the allowance method, inventories are being valued stilll at its cost. The loss on inventory write-down amount is accounted separately and accumulated to allowance for inventory write-down account. Ending inventories at cost P1,139,000 Ending inventories (at LCNRV) Allowance for inventory write-down, ending balance P_20,000 Beginning inventories at cost 2,500,000 Beginning inventories at NRV 2,500,000 Allowance for inventory write-down, beginning balance eo Allowance for inventory write-down, beginning balance P 0 Allowance for inventory write-down, ending balance 20,000 Loss on inventory write-down for the Y ‘inventory write-down, e allowance on inventory write-down, beginning balance, then, it is a “gain on reversal of inventory write-down". Requirement 4: Beginning inventories (at cost) 2,300,000 Add: Net purchases 5,000,000 ‘Total cost of goods available for sale (at cast) 7,500,000 Less: Ending inventories (at cost) 139,000 COGS under allowance method BEFORE inventory write-down PiadGLA000 Requirement 5: Beginning inventories (at cost) 2,500,000 ‘Add: Net purchases 5,000,000 ‘Total cost of goods available for sale (at cast) 7,500,000 Less: Ending inventories (at cost) 1.139.000 Cost of goods sold under allowance method before inventory write-down 6,361,000 Add: Loss on inventory write-down 20,000 COGS under allowance method AFTER inventory write-down ‘P6381,000 of the write-down at LCNRV is on the accounting only of the loss on inventory write-down amount and not on the actual amounts or valuations of inventories and cost of goods sold. 2.1.5. Financial Statement Presentation of Inventories ‘A company shall present all of its inventories, regardless of classifications, as part of current assets under one line item “Inventories” under the asset portion of the statement of financial position. But details comprising or composing those items are to be disclosed in the notes to financial statements.Sample Problem-solving 2: The following pertains to the ending inventories of HIGH SPEED Company: Inventories No. of units Unit cost Unit NRV A 1,000 110 105 B 2,000 125 140 c 3,000 133 128 D 2,500 152 152 Beginning inventories: Cost 2,500,000 Net realizable value 2,500,000 Net purchases 5,000,000 Requirements: 1, Compute the balance of ending inventory using direct method. 2. Compute the amount af cost of goods sold using direct method. 3. Compute the balance of ending inventory using allowance method. 4. Compute the amount of cost of goods sold before inventory write-down using allowance method. 5. Compute the amount of cost of goods sold after inventory write-down using allowance method. Solution: Requirement 1: Inventories No. of units Unit cost Unit NRV LCNRV Total A 1,000 110 105 105 P 105,000 B 2,000 125 140 125 250,000 c 3,000 133 128 128 384,000 D 2,500 152 152 152 380.000 Value of ending inventories at LCNRV PL119,000 | Requirement 2: Beginning inventories (at LCNRV) P2,500,000 ‘Add: Net purchases 5.000.000 ‘Total cost of goods available for sale (LCNRV) P7,500,000 Less: Ending inventories (at LCNRV) 1.119.000 Cost of goods sold under direct write-off P6.381.000 Requirement 3: Inventories No. of units Unit cost Total A 1,000 110 P 110,000 B 2,000 125 250,000 © 3,000 133 399,000 BD 2500 152 380.000 Value of ending inventories at cost F1,139.0003.1.4.3 Impairment of Inventories _____________ Impairment of inventories actually relates to the subsequent measurement of the inventories at lower of cast and net realizable value (LCNRV). An item of inventory is said to be impaired if the net realizable value (NRV) is LOWER than the cost or carrying value of the inventories. In that case, the difference between the cost and net realizable value shall be accounted for as “loss on inventory write-down” treated as an “expense” in the profit or loss statement. There are two methods may be applied in accounting for loss on inventory write-down, namely: 1. direct write-off method; and 2. allowance method. 3.14.3.1 Direct Write-Off Method Also known as cost of goods sold method. The following shall be observed: 1. The inventories are presented in the statement of financial position at the lower of cost and net realizable value (LCNRY). 2. No allowance account will be set up for the loss an inventory write-down amount. Hence, the loss on inventory write-down amount will not be accounted for separately. 3. The loss on inventory write-down amount shall be buried or closed to “cost of goods sold account” in the profit or loss statement. Also known as loss method. The following shall be observed: 1. The inventories are presented in the statement of financial position still at cost. 2. An allowance account will be set up for the loss on inventory write-down amount. Hence, the loss on inventory write-down amount will be accounted for separately. 3. The loss on inventory write-down amount shall be accumulated in the account “allowance for inventory write-down’ and will be presented as contra-asset account for inventories. ‘that the difference of the two method is only on the accounting and presentation for the loss on inventory write-down amount. The actual value of the inventories under the two methods will still be the same at lower of cost and net realizable value314.12. Cost of Inventories ofa Manufacturing-Concern —__________ Costs of Conversion - it shall mean the costs incurred of processing the raw materials to be converted into finished goods inventories during the production process. It includes the costs of the raw materials used, labor costs, and manufacturing overhead costs. 1, Costs of raw materials used - These shall mean the portion of the total cost of raw materials available for use that were requisitioned and introduced to the production process. 2. Labor costs - These are costs incurred to the labor personnel who are directly employed for the conversion of raw materials into finished goods inventories, and also the costs incurred to those who supervise the production process. 3, Manufacturing overhead costs - These are costs incurred other than the cost of raw materials used and labor costs that are necessary for the production process. These includes the costs paid for utilities such as electricity, water, rent of factory building and equipment and the depreciation charges related to those factory building and equipment, and other petty supplies. Hence, it also includes other costs related to production process whether fixed or variable. ‘The costs of conversion can be expressed as follows: Raw materials used Add: Labor costs incurred ‘Add: Manufacturing overhead costs incurred Total manufacturing costs (TMC) 21413 Cost of Inventories of a Service Provider The inventories of a service-concerned or service provider are so-called work-in-progress inventories. BREE The costs of work-in-progress inventories can be expressed as follows: Direct labor costs Add: Supervisory personnel service costs incurred Add: Attributable service overhead costs incurred Total costs of work-in-progress inventories Ele ee 3.14.14. Other Inventoriable Costs It-shall mean the costs incurred other than the costs of purchase and conversion. According to PAS 2, paragraph 15, other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include non-production overheads or the costs of designing products for specific customers in the costs of inventories. 3.1,4.2.At Subsequent Recognition A company shall measure its inventories subsequent to its initial recognition at the lower of cast and net realizable value (LCNRV). Such subsequent measurement shall be applied to inventaries generally in an item-by-item basis.‘2.14. Measurement of Inventories 00 BL4.L At Initial Recognition Generally, at initial recognition, inventories shall be measured at cost, which shall mean all the amount directly given up in order to acquire the inventories. Costs of inventories are also termed as inventoriable costs as follows: 1. costs of purchase; 2. costs of conversi 3. other inventoriable costs. (LLALL Cost of Inventories of a Merchandising-Concerm Costs of Purchase ~ It shall mean literally all the costs incurred directly attributable upon purchase which are considered part of the costs of the inventories purchased. 1. Purchase price - This shall mean the amount paid to the seller of purchased inventories This amount is usually found in an invoice, and purchase price of inventories is the invoice price at the date of purchase. ‘An invoice is a document bearing the billing amount of the inventories. It is called a sales invaice on the part of the seller, and a purchase invoice on the part af the buyer. 2 Import duties and other taxes - These are the costs incurred and paid to taxing authorities (as here in the Philippines, the Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC). Import duties are the costs paid to BOC related to importation or purchase of inventories from foreign suppliers. Other taxes shall mean those costs paid other than the import duties that are directly attributable to purchase of inventories. 3. Transport costs - These are the costs Incurred during the delivery or shipment of the inventories. Transport costs are commonly known as freight-in, transportation in, or delivery in costs. 4, Handling costs - These are costs usually incurred which are necessary to keep the inventories from being damage during transit and up to the delivery of the inventories to the intended location, and inventoriable costs. 5. Other directly attributable costs ~ These are other costs incurred directly related to purchase of inventories which are the costs that an entity will not incur should the inventories have not been purchased. ‘The costs of purchase can be expressed as follows: Purchase price ‘Add: Import duties and other taxes, ifany ‘Add: ‘Transportation costs Add: Handling costs attributable to purchase Add: Other directly attributable costs to purchase Total costs of purchase BERBER‘Sample Problem-solving 1: HIGH SPEED Company disclosed the following items of inventories for purposes of financial statement reporting for the year 2019: 1. Goods on hand and in the company warehouse 2. Goods purchased FOB shipping point, still in transit 3 Goods purchased FOB destination, still in transit 4 Goods sold under a repurchase agreement 5. Goods sold FOB shipping point, still in transit 6 — Goods sold FOB destination, still in transit 7. Freight costs incurred on purchased goods 8 Freight costs incurred on sold goods ‘9. Material and supplies remaining from production 10. Advertising costs incurred related to sold goods 11. Office and administrative supplies and stationaries 12. Material and supplies processed but not yet finished 13. Labor costs incurred an goods still in process 14. Factory overhead costs incurred goods still on process 15. Goods held by another company on consignment 16. Goods held by the company on consignment 17. Finished goods on hand and unsald 18. Goods in the display shelves of company-owned stores ti P1,000,000 200,000 250,000 320,000 150,000 150,000 130,000 350,000 420,000 Requirement Compute the total amount to be recognized as inventories of the company as of December 31, 2019. ‘Solution: Goods on hand and in the company warehouse Goods FOB shipping point, still in transit Goods sold under a repurchase agreement Goods sold FOB destination, still in transit Freight costs incurred on purchased goods Materials and supplies remaining from production Materials and supplies processed but not yet finished Labor costs incurred on goods still in process Factory overhead costs incurred goods still on process Goods held by another company on consignment Finished goods on hand and unsold Goods in the display shelves of company-owned stores ‘Total amount of inventories P1,000,000 320,000Free-alongside (FAS) - Under this shipping term, the seller is the one liable for all transport costs and bears all the risks of delivering the inventories to the shipping area, commonly known as the dock, which a place alongside the intended shipping vessel or transport ‘After that, the buyer is the one Hable for the costs of loading the inventories to the shipping vessel and the freight costs from the dock to the place of the buyer, The buyer becomes the ultimate owner of the inventories upon taking the inventories by and to the identified carrier, and therefore, bears all the risk of shipment of the inventories. 4. Cost, insurance, and freight (CIF) ~ Under this shipping term, the buyer agrees to be the one liable for all the costs associated with the shipment of the inventories which are the costs of the inventories to be shipped, the insurance casts related to the shipment, and the freight costs, Upon the delivery of the inventories to the identified carrier, the buyer becomes the ultimate owner and bears all the risk of shipment of the inventories However, the seller liable for the cost of loading of the inventories to the identified carrier. 5, Ex-ship term - Under this shipping term, the seller is the one liable for all the cost of shipment and bears all the risk of shipment of the inventories until the time of unloading from the identified carrier. After unloading of the inventories to the Identified carrier, the buyer becomes the ultimate owner and bears all the risk of shipment of the inventories. Shipment of Inventories Carrier Free on Board (rob) Seller] Dock Buyer Oar OD Shipping Area Destination4.1L.3.Legal Ownership Test for Inventories The legal ownership test will actually determine on what are the items of inventories that can be induded in the “inventory” account of a company. As a rule, title of ownership on items of inventory can be exercised regardless of the location of the inventories. Applying the legal ownership test, the following shall be included in the “inventory” account: 1. inventories on owned and hand; 2. inventories in transit and sold FOB destination; 3. inventories in transit and purchased FOB shipping point; 4. inventories out on consignment; 5. inventories held by agents, salesmen, or distribution personnel are recognized as inventories of the principal; and 6. inventories held by buyers or customers for approval or on trial or on repurchase agreements are recognized as inventories of the seller. Shipping terms associated with transport of inventories are sometimes used as determining factors to consider as to who has the legal right or title of ownership over the inventories. ‘The following freight and other maritime shipping terms and rules may be considered: 1. FOB shipping point - This ts also known as FOB seller. Under this shipping term, generally, the ownership over the inventories is transferred from the seller to the buyer upon shipment. The buyer is the one responsible for the payment of the freight charges to the identified carrier. ‘The buyer recognizes the inventories within its records even if the inventories are still in transit. 2 FOB shipping point, freight prepaid - Sometimes, when inventories are shipped under FOB shipping point, there are instances that the buyer is unable to pay the freight costs to the identified carrier or sometimes the buyer and the seller agreed that the seller will shoulder the freight costs even if the term of shipment is FOB shipping point, and the case become freight prepaid. Under this scenario, the buyer has the responsibility to pay the seller, other than the invoice price of the inventories purchased, an additional amount equal to the freight costs paid by the seller to the identified carrier. 2. FOB destination - This is also known as FOB buyer. Under this shipping term, generally, the ownership over the inventories is transferred from the seller to the buyer upon reaching the destination paint, thatis, the place ofthe buyer. The seller \sthe one responsible for the payment of the freight charges to the identified carrier. ‘The seller still recognizes the inventories within its records if the inventories are still in transit. However, the buyer recognizes the same within its record upon unloading from the carrier and the receipt of the inventories. 2. FOB destination, freight collect ~ Sometimes, when inventories are shipped FOB destination, there are instances that the seller is unable to pay the freight costs to the identified carrier or sometimes the buyer and the seller agreed that the buyer will shoulder the freight costs even if the term of shipment is FOB destination, and the case become freight collect. Under this scenario, the seller has the responsibility to pay the buyer an amount equal to the freight costs paid by the buyer to the identified carrier. 2BL Overview of Inventories J Have you experienced selling something, or having a family sari-sari store, or being in a department store? If yes, then the items you have on hand for sale, the goods you have in the sari-sari store or those displayed on the shelves of department stores are called inventories. What does it mean by inventory in accounting perspective? Let us find out. LLL Definition of Inventories Inacounting, we define inventories in accordance with PAS 2, paragraph 6, as inventories are assets: held for sale in the ordinary course of business; b. inthe process of production for such sale; or © inthe form of materials or supplies to be consumed in the production process or in the rendering of service. Inventories are assets held for sale in the ordinary course of business which means they form part of the trading activities of a company. Inventories are assets im the process of production for such sale which means they are finished products or had undergone production process before finally being distributed to the final consumers in a way of sale or selling process. Inventories are assets in the form of materials or supplies to be consumed in the production process or in the rendering of service which means they form part or as components that form part of the final product in case those that had undergone production process or the materials and/or tools used as aide in order to render a service. 2.1.2. Classification af Inventories ________ Recognition and classifications of inventories also depends on the nature of the company’s business, meaning, whether merchandising-concerned, manufacturing-concerned, or servicing-concerned. “The following may serve as guide in classifying inventories for purposes of nature of the company's business: 1. inventories of a merchandising-concerned are classified as merchandise inventories; 2. inventories of a manufacturing-cancerned are classified a5 either raw material inventories, work-in-process inventories, or finished goods inventories; a. raw materials inventories are those inventories that are purchased or acquired that are later introduced to production process in order to be converted into final products. Raw materials strictly include all the materials that are traceable to the final product or those that are physically incorporated or introduced during the production process. Logically, na work or process has been done yet to this kind of inventories. b. work-in-process inventories are those inventories that had already undergone production process but remained unfinished up to the end of the period of production process. Logically, additional works or processes are still required to finish such inventories and before it can finally be sold. © finished goods inventories are those inventories that are fully manufactured and are already final products ready to be sold to final consumers. 3. inventories of a servicing-concerned have no proper naming but may be classified as work-in-progress inventories which are the supplies used in rendering the service. 1