INVENTORY

VALUATION
OF INVENTORY
 “

A.
PAS 2
 comprises:
•
•
•
Hinata Company has incurred the following costs during the
current year:
Cost of purchases based on vendors’ invoices 5,000,000
Trade discounts on purchases already
deducted from vendors’ invoices 500,000
Import duties 400,000
Freight and insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Salaries of accounting department 600,000
Brokerage commission paid to agents
for arranging imports 200,000
Sales commission paid to sales agents 300,000
After-sales warranty costs 250,000
Hinata Company has incurred the following costs during the
current year:
Cost of purchases based on vendors’ invoices 5,000,000
Trade discounts on purchases already
deducted from vendors’ invoices 500,000
Import duties 400,000
Freight and insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Salaries of accounting department 600,000
Brokerage commission paid to agents
for arranging imports 200,000
Sales commission paid to sales agents 300,000
After-sales warranty costs 250,000
Hinata Company has incurred the following costs during the
current year:
Cost of purchases based on vendors’ invoices 5,000,000
Trade discounts on purchases already
deducted from vendors’ invoices 500,000
Import duties 400,000
Freight and insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Salaries of accounting department 600,000
Brokerage commission paid to agents
for arranging imports 200,000
Sales commission paid to sales agents 300,000
After-sales warranty costs 250,000
Total Cost 6,700,000
Hinata Company has incurred the following costs during the
current year:
Cost of purchases based on vendors’ invoices 5,000,000
Trade discounts on purchases already
deducted from vendors’ invoices 500,000
Import duties 400,000
Freight and insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Salaries of accounting department 600,000
Dr. Inventory 6,700,000
B rokerage commission paid to agents
Cr. Cash 6,700,000
for arranging imports 200,000
<To record the purchased inventories>
S ales commission paid to sales agents 300,000
After-sales warranty costs 250,000
Total Cost 6,700,000
IS DEFINED AS
Amount of cash
expected tobe collected
or the estimated
recoverable amount
Based on a physical inventory taken on December 31, 2021,
Kiba Co. determined its chocolate inventory on a FIFO
basis at PHP 5,200,000 with a replacement cost of PHP
4,000,000. Kiba estimated that, after further processing
costs of PHP 2,400,000, the chocolate could be sold as
finished candy bars for PHP 8,000,000. Kiba’s normal profit
margin is 10% of sales. What amount should Kiba report as
chocolate inventory on December 31, 2021?
Based on a physical inventory taken on December 31, 2021,
Kiba Co. determined its chocolate inventory on a FIFO
basis at PHP 5,200,000 with a replacement cost of PHP
4,000,000. Kiba estimated that, after further processing
costs of PHP 2,400,000, the chocolate could be sold as
finished candy bars for PHP 8,000,000. Kiba’s normal profit
margin is 10% of sales. What amount should Kiba report as
chocolate inventory on December 31, 2021?
Cost of Inventory 5,200,000
Estimated Sales Price 8,000,000
Cost to Complete – Processing Cost (2,400,000)
Net Realizable Value 5,600,000
Based on a physical inventory taken on December 31, 2021
1,
Kiba Co. determined its chocolate inventory on a FIFO
ba P
4,0 ng
cos s
fini No entry. fit
m Inventory is already valuated at PHP 5,200,000. s
ch

Cost of Inventory 5,200,000

Estimated Sales Price 8,000,000

Cost to Complete – Processing Cost (2,400,000)
Net Realizable Value 5,600,000
when sold, the objective:
 “

B.
PAS 2
 B.
PAS 2
 “

C.
PAS 2
”
METHODS
 FIFO
the goods first purchased are first sold.
the goods remaining are most
recently purchased/produced
in accordance with
ordinary merchandising procedure
FAiVnOveRntSoryTHatEcuBrrAenLt AreNplaCcEemSeHntEcEosTt
FIFO
 FIFO
FAVORS THE BALANCE SHEET:
 FIFO
OBJECTION:
FIFO
EFFECT:
The following data pertain to an inventory item:
Date Transaction Units Unit Total Sales
Cost Cost (in units)
January 1 Beg. Bal. 800 200 160,000
January 8 Sale 500
January 18 Purchase 700 210 147,000
January 22 Sale 800
January 31 Purchase 500 220 110,000

The ending inventory is 700 units.

 Date Transaction Units Unit Total Sales
Cost Cost (in units)
January 1 Beg. Bal. 800 200 160,000
January 8 Sale 500
January 18 Purchase 700 210 147,000
January 22 Sale 800
January 31 Purchase 500 220 110,000

Computing for Cost of Goods Sold:

Source Units Unit Cost Total Cost
For January 8 sale:
500
 Date Transaction Units Unit Total Sales
Cost Cost (in units)
January 1 Beg. Bal. 300 200 160,000
January 8 Sale 500
January 18 Purchase 700 210 147,000
January 22 Sale 800
January 31 Purchase 500 220 110,000

Computing for Cost of Goods Sold:

Source Units Unit Cost Total Cost
For January 8 sale:
From January 1 Balance 500 200 100,000
For January 22 sale:
800
 Date Transaction Units Unit Total Sales
Cost Cost (in units)
January 1 Beg. Bal. 0 200 160,000
January 8 Sale 500
January 18 Purchase 200 210 147,000
January 22 Sale 800
January 31 Purchase 500 220 110,000

Computing for Cost of Goods Sold:

Source Units Unit Cost Total Cost
For January 8 sale:
From January 1 Balance 500 200 100,000
For January 22 sale:
From January 1 Balance 300 200 60,000
From January 18 Balance 500 210 105,000
 Date Transaction Units Unit Total Sales
Cost Cost (in units)
January 1 Beg. Bal. 0 200 160,000
January 8 Sale 500
January 18 Purchase 200 210 147,000
January 22 Sale 800
January 31 Purchase 500 220 110,000

Computing for Cost of Goods Sold:

Source Units Unit Cost Total Cost
For January 8 sale:
From January 1 Balance 500 200 100,000
For January 22 sale:
From January 1 Balance 300 200 60,000
From January 18 Balance 500 210 105,000
Cost of Goods Sold 265,000
 Date Transaction Units Unit Total Sales
Cost Cost (in units)
January 1 Beg. Bal. 800 200 160,000
January 8 Sale 500
January 18 Purchase 700 210 147,000
January 22 Sale 800
January 31 Purchase 500 220 110,000

Computing for Ending Inventory:

Source Units Unit Cost Total Cost
From January 18 Purchase 200 210 42,000
From January 31 Purchase 500 220 110,000
Ending Inventory 700 152,000
 Date Transaction Units Unit Total Sales
Cost Cost (in units)
January 1 Beg. Bal. 800 200 160,000
January 8 Sale 500
January 18 Purchase 700 210 147,000
January 22 Sale 800
January 31 Purchase 500 220 110,000
Ending Inventory 700 152,000

Computing for Cost of Goods Sold:

Inventory – January 1 160,000
Purchases (147,000 + 110,000) 257,000
Goods available for sale 417,000
Inventory – January 31 (152,000)
Cost of Goods Sold 265,000
Cost of Goods Sold 265,000
Assuming there’s no other inventory related transactions
previously than those in January; if January 31 is the end of
reporting period and the ending inventory is already counted:
Dr. Inventory – January 31 152,000
Cost of Goods Sold 265,000
Cr. Inventory – Feb 1 160,000
Net Purchases 257,000
!! Remember: COGS is computed as a balancing figure
when Ending Inventory is already counted at the end of
reporting period and after determining the Net
Purchases (Purchases - Dscts, Returns, Allowances).
OR:
Dr. Inventory – January 31 152,000
Cr. Income Summary 152,000
!! COGS will already be inclusive in the Income
Summary Account as you will ultimately close the
Beginning Inventory and Purchases Accounts with the
Income Summary Account.
This requires the preparation of stock card:
Purchases Sales Balance

Date Units Unit Total Units Unit Total Units Unit Total
Cost Cost Cost Cost Cost Cost
Jan 1 800 200 160,000
Jan 8 500 200 100,000 300 200 60,000
Jan 18 700 210 147,000 300 200 60,000
700 210 147,000
Jan 22 300 200 60,000
500 210 105,000 200 210 42,000
Jan 31 500 220 110,000 200 210 42,000
500 220 110,000
This requires the preparation of stock card:
Purchases Sales Balance

Date Units Unit Total Units Unit Total Units Unit Total
Cost Cost Cost Cost Cost Cost
Jan 1 800 200 160,000
Jan 8 500 200 100,000 300 200 60,000
Jan 18 700 210 147,000 300 200 60,000
700 210 147,000
Jan 22 300 200 60,000
500 210 105,000 200 210 42,000
Jan 31 500 220 110,000 200 210 42,000
500 220 110,000
This requires the preparation of stock card:
Purchases Sales Balance

Date Units Unit Total Units Unit Total Units Unit Total
Cost Cost Cost Cost Cost Cost
Jan 1 800 200 160,000
Jan 8 500 200 100,000 300 200 60,000
Jan 18 700 210 147,000 300 200 60,000
700 210 147,000
Jan 22 300 200 60,000
500 210 105,000 200 210 42,000
Jan 31 500 220 110,000 200 210 42,000
500 220 110,000

Cost of Goods Sold:

January 8 sale 100,000
January 22 sale (60,000 + 105,000) 165,000
Total Cost of Goods Sold 265,000
We record COGS by matching with Sales Revenue.
For example:
January 8 transaction:
Dr. Cash or Accounts Receivable xxxxx
Cr. Sales Revenue xxxxx
Dr. Cost of Goods Sold 100,000
Cr. Inventory 100,000
!! No need for an entry to record an Ending Inventory at
the end of reporting period since Inventory is adjusted
on every transaction affecting it.
 WTD AVE
WEIGHTED AVERAGE UNIT COST FORMULA
(cost of beginning inventory + total cost of purchases during
the period) / (total units purchased + units in the beginning
inventory)
the average unit cost is multiplied by the units on hand
TO GET INVENTORY VALUE
divide the total cost of goods available for sale by the
total number of units available for sale
The following data pertain to an inventory item:
Date Transaction Units Unit Total
Cost Cost
January 1 Beginning Balance 800 200 160,000
January 18 Purchase 700 210 147,000
January 31 Purchase 500 220 110,000

The ending inventory is 700 units.

The following data pertain to an inventory item:
Date Transaction Units Unit Total
Cost Cost
January 1 Beginning Balance 800 200 160,000
January 18 Purchase 700 210 147,000
January 31 Purchase 500 220 110,000
Total Goods Available for Sale 2,000 417,000
The following data pertain to an inventory item:
Date Transaction Units Unit Total
Cost Cost
January 1 Beginning Balance 800 200 160,000
January 18 Purchase 700 210 147,000
January 31 Purchase 500 220 110,000
Total Goods Available for Sale 2,000 417,000

Weighted Average Unit Cost (417,000/2,000) 208.50

Inventory Cost (700 x 208.50) 145,950
The following data pertain to an inventory item:
Date Transaction Units Unit Total
Cost Cost
January 1 Beginning Balance 800 200 160,000
January 18 Purchase 700 210 147,000
January 31 Purchase 500 220 110,000
Total Goods Available for Sale 2,000 417,000

Weighted Average Unit Cost (417,000/2,000) 208.50

Inventory Cost (700 x 208.50) 145,950
Computing for Cost of Goods Sold:
Inventory – January 1 160,000
Purchases (147,000 + 110,000) 257,000
Goods available for sale 417,000
Inventory – January 31 (145,950)
Cost of Goods Sold 271,050
The following data pertain to an inventory item:
Unit Total
Date Transaction Units Cost Cost
Ja nuary 1 Beginning Balance 800 200 160,000
Ja nuary 18 Purchase 700 210 147,000
JanuaryDr.
31 Inventory – January 31
Purchase 500 220
145,950 110,00 0
TCr.
otal Goods Available for Sale
Income Summary 2,000 417,000
145,950
Weighted Average Unit Cost (417,000/2,000) 208.50
Inventory Cost (700 x 208.50) 145,950

Computing for Cost of Goods Sold:

Inventory – January 1 160,000
Purchases (147,000 + 110,000) 257,000
Goods available for sale 417,000
Inventory – January 31 (145,950)
Cost of Goods Sold 271,050
 WTD AVE
When weighted average is used in conjunction with perpetual system,
it will be known as MOVING AVERAGE METHOD
weighted average may be calculated on a periodic basis
or as each additional shipment is received
a new weighted average unit cost is computed after every purchase
requires keeping of inventory stock card in order to monitor
“moving” unit cost after every purchase
This requires the preparation of stock card:
Date Transaction Units Unit Cost Total Cost
Jan 1 Balance 800 200 160,000
Jan 8 Sale (500) 200 (100,000)
Balance 300 200 60,000
This requires the preparation of stock card:
Date Transaction Units Unit Cost Total Cost
Jan 1 Balance 800 200 160,000
Jan 8 Sale (500) 200 (100,000)
Balance 300 200 60,000
Jan 18 Purchase 700 210 147,000
This requires the preparation of stock card:
Date Transaction Units Unit Cost Total Cost
Jan 1 Balance 800 200 160,000
Jan 8 Sale (500) 200 (100,000)
Balance 300 200 60,000
Jan 18 Purchase 700 210 147,000
Total 1000 207,000
This requires the preparation of stock card:
Date Transaction Units Unit Cost Total Cost
Jan 1 Balance 800 200 160,000
Jan 8 Sale (500) 200 (100,000)
Balance 300 200 60,000
Jan 18 Purchase 700 210 147,000
Total 1000 207 207,000
This requires the preparation of stock card:
Date Transaction Units Unit Cost Total Cost
Jan 1 Balance 800 200 160,000
Jan 8 Sale (500) 200 (100,000)
Balance 300 200 60,000
Jan 18 Purchase 700 210 147,000
Total 1000 207 207,000
Jan 22 Sale (800) 207 (165,600)
Balance 200 207 41,400
This requires the preparation of stock card:
Date Transaction Units Unit Cost Total Cost
Jan 1 Balance 800 200 160,000
Jan 8 Sale (500) 200 (100,000)
Balance 300 200 60,000
Jan 18 Purchase 700 210 147,000
Total 1000 207 207,000
Jan 22 Sale (800) 207 (165,600)
Balance 200 207 41,400
Jan 31 Purchase 500 220 110,000
This requires the preparation of stock card:
Date Transaction Units Unit Cost Total Cost
Jan 1 Balance 800 200 160,000
Jan 8 Sale (500) 200 (100,000)
Balance 300 200 60,000
Jan 18 Purchase 700 210 147,000
Total 1000 207 207,000
Jan 22 Sale (800) 207 (165,600)
Balance 200 207 41,400
Jan 31 Purchase 500 220 110,000
Total 700 151,400
This requires the preparation of stock card:
Date Transaction Units Unit Cost Total Cost
Jan 1 Balance 800 200 160,000
Jan 8 Sale (500) 200 (100,000)
Balance 300 200 60,000
Jan 18 Purchase 700 210 147,000
Total 1000 207 207,000
Jan 22 Sale (800) 207 (165,600)
Balance 200 207 41,400
Jan 31 Purchase 500 220 110,000
Total 700 216.29 151,400
This requires the preparation of stock card:
Date Transaction Units Unit Cost Total Cost
Jan 1 Balance 800 200 160,000
Jan 8 Sale (500) 200 (100,000)
Balance 300 200 60,000
Jan 18 Purchase 700 210 147,000
Total 1000 207 207,000
Jan 22 Sale (800) 207 (165,600)
Balance 200 207 41,400
Jan 31 Purchase 500 220 110,000
Total 700 216.29 151,400

Cost of Goods Sold 265,600

Match journal entries on inventories for each transactions.

PROS
CONS
 LIFO
the goods last purchased are first sold.
the goods remaining are those
first purchased or produced
FAVORS THE INCOME STATEMENT
matching of current cost against current revenue
 LIFO
FAVORS THE INCOME STATEMENT:
 LIFO
FAVORS THE INCOME STATEMENT:
LIFO
OBJECTION:
LIFO
OBJECTION:
LIFO
EFFECT:
The following data pertain to an inventory item:
Date Transaction Units Unit Total Sales
Cost Cost (in units)
January 1 Beg. Bal. 800 200 160,000
January 8 Sale 500
January 18 Purchase 700 210 147,000
January 22 Sale 800
January 31 Purchase 500 220 110,000

The ending inventory is 700 units.

The following data pertain to an inventory item:
Date Transaction Units Unit Total Sales
Cost Cost (in units)
January 1 Beg. Bal. 800 200 160,000
January 8 Sale 500
January 18 Purchase 700 210 147,000
January 22 Sale 800
January 31 Purchase 500 220 110,000

The ending inventory is 700 units.

The following data pertain to an inventory item:
Date Transaction Units Unit Total Sales
Cost Cost (in units)
January 1 Beg. Bal. 800 200 160,000
January 8 Sale 500
January 18 Purchase 700 210 147,000
January 22 Sale 800
January 31 Purchase 500 220 110,000

The ending inventory is 700 units.

Units Unit Cost Total Cost
From January 1 Balance 700 200 140,000
The following data pertain to an inventory item:
Date Transaction Units Unit Total Sales
Cost Cost (in units)
January 1 Beg. Bal. 800 200 160,000
January 8 Sale 500
January 18 Purchase 700 210 147,000
January 22 Sale 800
January 31 Purchase 500 220 110,000

From January 1 Balance 700 200 140,000

Computing for Cost of Goods Sold:
Inventory – January 1 160,000
Purchases (147,000 + 110,000) 257,000
Goods available for sale 417,000
Inventory – January 31 (140,000)
Cost of Goods Sold 277,000
The following data pertain to an inventory item:
Unit Total Sales
Date Transaction Units Cost Cost (in units )
January 1 Beg. Bal. 800 200 160,000
January 8 Sale 500
JanuaryDr.
18 Purchase – January
Inventory 700 31 210 140,000
147,000
JanuaryCr.
22 Sale Income Summary 140,000 800
January 31 Purchase 500 220 110,000

From January 1 Balance 700 200 140,000

Computing for Cost of Goods Sold:
Inventory – January 1 160,000
Purchases (147,000 + 110,000) 257,000
Goods available for sale 417,000
Inventory – January 31 (140,000)
Cost of Goods Sold 277,000
This requires the preparation of stock card:
Purchases Sales Balance

Date Units Unit Total Units Unit Total Units Unit Total
Cost Cost Cost Cost Cost Cost
Jan 1 800 200 160,000
Jan 8 500 200 100,000 300 200 60,000
Jan 18 700 210 147,000 300 200 60,000
700 210 147,000
Jan 22 700 210 147,000
100 200 20,000 200 200 40,000
Jan 31 500 220 110,000 200 200 40,000
500 220 110,000
This requires the preparation of stock card:
Purchases Sales Balance

Date Units Unit Total Units Unit Total Units Unit Total
Cost Cost Cost Cost Cost Cost
Jan 1 800 200 160,000
Jan 8 500 200 100,000 300 200 60,000
Jan 18 700 210 147,000 300 200 60,000
700 210 147,000
Jan 22 700 210 147,000
100 200 20,000 200 200 40,000
Jan 31 500 220 110,000 200 200 40,000
500 220 110,000
This requires the preparation of stock card:
Purchases Sales Balance

Date Units Unit Total Units Unit Total Units Unit Total
Cost Cost Cost Cost Cost Cost
Jan 1 800 200 160,000
Jan 8 500 200 100,000 300 200 60,000
Jan 18 700 210 147,000 300 200 60,000
700 210 147,000
Jan 22 700 210 147,000
100 200 20,000 200 200 40,000
Jan 31 500 220 110,000 200 200 40,000
500 220 110,000

Cost of Goods Sold:

January 8 sale 100,000
January 22 sale (147,000 + 20,000) 167,000
Total Cost of Goods Sold 267,000
This requires the preparation of stock card:
Purchases Sales Balance
Date Units Unit Total Units Unit Total Units Unit Total
Cost Cost Cost Cost Cost Cost
Jan 1 800 200 160,000
Ending Inventory
Jan 8 140,000
500 200 100,000
Ending 300
Inventory 200 60,000
150,000
Jan 18 300 200 60,000
COGS700 210 147,000
277,000 COGS 700 267,000
210 147,000
Jan 22 700 210 147,000
100 200 20,000 200 200 40,000
Jan 31 500 220 110,000 200 200 40,000
500 220 110,000
Cost of Goods Sold:

January 8 sale 100,000

January 22 sale (147,000 + 20,000) 167,000
Total Cost of Goods Sold 267,000
…looking back
 “

C.
PAS 2
”
 SPECIFIC ?
what is

IDENTIFICATION
 SPECIFIC ?
what is

IDENTIFICATION
 SPECIFIC ?
what is

IDENTIFICATION
 SPECIFIC ?
what is

IDENTIFICATION
 SPECIFIC ?
what is

IDENTIFICATION
Shino Co. is a business dedicated to manufacture and sell
furniture ordinarily to individual customers. Suppose that
Shino Co. entered a contract with Naruto Co. on a major
project to build a themed-museum wherein it is stipulated
that Shino Co. will supply the furniture needed (e.g. display
tables, chairs, etc.).

Given that this project that Shino Co. entered into asks the
company to make inventories that are not ordinarily
interchangeable, and that should be segregated because
these inventories are dedicated to a specific project,
specific identification method of inventory valuation should be
used.
Let’s say that the costs of the finished furniture are as follows:

P 20,000 P 100,000 P 10,000 P 50,000

Simply calculate the units with their prices.

For example, I sold 2 and 1 . How much is my

COGS?
Let’s say that the costs of the finished furniture are as follows:

P 20,000 P 100,000 P 10,000 P 50,000

Simply calculate the units with their prices.

For example, I sold 2 and 1 . How much is my

COGS? P 90,000
Let’s say that the costs of the finished furniture are as follows:

P 20,000 P 100,000 P 10,000 P 50,000

Simply calculate the units with their prices.

Now, I checked my inventory and I still had 5 on

hand. How much is my Ending Inventory?
Let’s say that the costs of the finished furniture are as follows:

P 20,000 P 100,000 P 10,000 P 50,000

Simply calculate the units with their prices.

Now, I checked my inventory and I still had 5 on

hand. How much is my Ending Inventory? P 500,000
PROS
CONS
NET
REALIZABLE
VALUE
NET
REALIZABLE
VALUE
NET
REALIZABLE
VALUE
NET
REALIZABLE
VALUE
DETERMINATION
OF NRV
DETERMINATION
OF NRV
DETERMINATION
OF NRV
DETERMINATION
OF NRV
DETERMINATION
OF NRV
The inventory is recorded at lower of cost or NRV. Any loss
on inventory writedown is not accounted for separately but
“buried” in the cost of goods sold.
 The inventory is recorded at cost and any loss on inventory
writedown is accounted for separately. A loss account “loss
on inventory writedown” is debited and a valuation account
“allowance for inventory writedown” is credited.
 In subsequent years, this allowance account is adjusted
upward or downward depending on the difference between
the cost and NRV of the inventory at year-end.
 If the required allowance increases, an additional loss is
recognized. If the required allowance decreases, a gain on
reversal of inventory writedown is recorded. However, the
gain is limited only to the extent of the allowance balance.
 Preferably, the allowance method is used in order that the
effects of writedown and reversal of writedown can be clearly
identified.

PAS 2 requires disclosure of the amount of any inventory

writedown and the amount of any reversal of inventory
writedown.
The inventory records show the following data on December
31, 2021.
Units Unit Cost NRV
Materials
#1 1,000 11 10
#2 3,000 23 25
#3 2,000 30 32
Goods in process
X 5,000 40 38
Y 3,000 50 52
Finished goods
A 2,000 75 73
B 2,000 80 83
Computing for Total Cost and NRV:
Total Cost NRV Lower
Materials
#1 11,000 10,000 10,000
#2 69,000 75,000 69,000
#3 60,000 64,000 60,000
Goods in process
X 200,000 190,000 190,000
Y 150,000 156,000 150,000
Finished goods
A 150,000 146,000 146,000
B 160,000 166,000 160,000
Total 800,000 785,000
Computing for Total Cost and NRV:
Total Cost NRV Lower
MaterialsInventory – December 31, 2021
Dr. 785,000
Cr. Income Summary 785,000
#1 11,000 10,000 10,000
#2 69,000 75,000 69,000
#3 60,000 64,000 60,000
Dr.
Goods inInventory
process – December 31, 2021 800,000
Cr.
X Income Summary 200,000 190,000 800,000
190,000
Y 150,000 156,000 150,000
Finished Loss
Dr. goods on Inventory Writedown 15,000
A 150,000
Cr. Allowance for Inv. Writedown146,00015,000146,000
B 160,000 166,000 160,000
Total 800,000 785,000
 The loss on inventory writedown is included in the
computation of COGS. The allowance for inventory
writedown is presented as deduction from inventory:

Inventory – December 31, 2021, at cost 800,000

Allowance for Inventory writedown (15,000)
Net Realizable Value 785,000
Assume on December 31, 2021, the total cost of the inventory is
PHP 1,000,000 and the NRV is PHP 990,000:

Direct Method
Dr. Inventory – December 31, 2021 990,000
Cr. Income Summary 990,000
Allowance Method
Cost 1,000,000
NRV 990,000
Required allowance for 2021 10,000
2020 Allowance Balance (15,000)
Decrease in Allowance (5,000)

The decrease in allowance is a reversal of the previous

inventory writedown:
Dr. Allowance for inv. Writedown 5,000
Cr. Gain on reversal of inv. 5,000
Writedown
The gain on reversal of inventory writedown is presented as a
deduction from COGS.
STANDARD
COSTS
STANDARD
COSTS
STANDARD
COSTS
relative sales
PRICE METHOD
relative sales
PRICE METHOD
ILLUSTRATION –

Products A, B, and C are purchased at a “basket price” of PHP

3,000,000. Assume that the said products have the following
sales price: A: PHP 500,000; B: PHP 1,500,000; and C: PHP
3,000,000.
relative sales
PRICE METHOD
The cost of each product is computed as follows:

Product A 500,000 5/50 x 3,000,000 300,000

Product B 1,500,000 15/50 x 3,000,000 900,000
Product C 3,000,000 30/50 x 3,000,000 1,800,000
Total 5,000,000 3,000,000
PURCHASE COMMITMENTS
Are obligations of the entity to acquire certain goods
sometime in the future at a fixed price and fixed
quantity

A purchase contract has already been made for

future delivery of goods fixed in price and in
quantity

If significant or unusual, disclosure is required in the

notes

Losses which are expected to arise from firm and

non-cancellable commitments shall be recognized
PURCHASE COMMITMENTS
If there is a decline in purchase price after a
purchase commitment has been made, a loss is
recorded in the period of the price decline.

The fall in purchase price as against the agreed price

is accounted for as debit to loss on purchase
commitments and credit to an estimated liability.

If loss on purchase commitment is material and actual

in the sense that the purchase price falls below the
agreed price at the end of the reporting period, the
amount of the loss shall be recognized.
The contract purchase price is PHP 500,000 and the
replacement cost at year-end is PHP 450,000. The market
decline of PHP 50,000 is recorded as follows:

Dr. Loss on purchase commitment 50,000

Cr. Estimated liability for purchase commitment 50,000

The loss on purchase commitment is classified as other

expense and the estimated liability for purchase
commitment is classified as current liability.
When the actual purchase is made in the subsequent period
and the current replacement cost drops further to PHP
420,000, the entry is:

Dr. Purchases 420,000

Loss on Purchase commitment 30,000
Estimated liability for purchase
commitment 50,000
Cr. Account Payable 500,000
 Accordingly, if market price rises by the time the entity
makes the purchase, a gain on purchase commitment would
be recorded.

However, the amount of gain to be recognized is limited to

the loss on purchase commitment previously recorded.
Thus, if replacement cost of the purchase commitment is
PHP 600,000 when the actual purchase is made, the entry to
record the actual purchase is:

Dr. Purchases 500,000

Estimated liability for purchase
commitment 50,000
Cr. Accounts payable 500,000
Gain on purchase commitment 50,000

The gain on purchase commitment is classified as other

income.
And if the replacement cost of the purchase commitment is
PHP 480,000 when the actual purchase is made, the entry to
record the actual purchase is:

Dr. Purchases 480,000

Estimated liability for purchase
commitment 50,000
Cr. Accounts payable 500,000
Gain on purchase commitment 30,000
DISCLOSURES IN F/S
DISCLOSURES IN F/S
SPECIAL
CASES
Agricultural, Forest and Mineral
Products
Commodities of Broker-Traders
Commodities of Broker-Traders
END.