2/20/2023

Inventories
Philippine Accounting Standards (PAS) 2

Learning Objectives

• Define inventories.
• Measure inventories and apply the cost formulas.
• State the accounting for inventory write-down and the reversal
thereof.

1
 2/20/2023

Objective of PAS 2

• To prescribe the accounting treatment for

inventories.
• It provides guidance for determining the cost of
inventories and for subsequently recognizing an
expense, including any write-down to net realizable
value.
• It also provides guidance on the cost formulas that
are used to assign costs to inventories.
4

Inventories (Scope of PAS 2)

Inventories are assets:

• Held for sale in the ordinary course of business
(Finished Goods);
• In the process of production for such sale (Work In
Process); or
• In the form of materials or supplies to be consumed in
the production process or in the rendering of services
(Raw materials and manufacturing supplies).
5

2
 2/20/2023

Inventories not covered by PAS

2
PAS 2 applies to all inventories except for the following:
• Financial Instruments (PAS 32 and PFRS 9); and
• Biological Assets and Agricultural produce at the point
of harvest (PAS 41)

Measurement

Inventories are measured at the lower of cost and net

realizable value (LCNRV)

3
 2/20/2023

Cost of Inventories

• Purchase Costs – this includes the purchase price 9net of

trade discounts and other rebates), import duties, non-
refundable or non-recoverable purchase taxes, and transport,
handling and other cost directly attributable to the acquisition
of the inventory.
• Conversion Costs – refer to the cost necessary to in
converting raw materials into finished goods.
• Other Costs – necessary in bringing the inventories to their
present location and condition.
8

Excluded from the Cost of

Inventories
1. Abnormal amounts of wasted materials, labor or other
production costs.
2. Selling costs, for example, advertising and promotion costs
and delivery expense or freight out.
3. Administrative overheads that do not contribute to
bringing inventories to their present location and condition.
4. Storage costs, unless those costs are necessary in the
production process before a further production stage, (e.g., the
storage costs of partly finished goods may be capitalized as
cost of inventory, but the storage costs of completed finished
9
goods are expensed).
9

4
 2/20/2023

Cost of Invetories - Illustration

Entity A acquires inventories and incurs the following costs:

Purchase price, gross of trade discount 100,000 100,000
Trade Discount 20,000 (20,000)
Non-refundable purchase tax, no included
in the purchase price above 5,000 5,000
Freight-in (Transportation costs) 15,000 15,000
Commission to broker 2,000 2,000
Advertisement costs 10,000 -
102,000
Requirement: How much is the cost of the inventories purchased?

Cost of Inventories 102,000

10

10

Cost Formulas

The cost formulas deal with the computation of cost

of inventories that are charged as expense when the
related revenue is recognized as well as the cost of the
unsold inventories at the end of the period that are
recognized as asset.
• Specific Identification
• First-In, First-Out (FIFO)
• Weighted Average

11

11

5
 2/20/2023

Specific Identification

This shall be used for inventories that are not ordinarily

interchangeable and those that are segregated for specific
projects.
• Cost of Sales – represents the actual costs of the specific
items sold
• Ending Inventory – represents the actual costs of the
specific item on hand
Specific identification is not appropriate when
inventories consist of large number of items that are
ordinarily interchangeble 12

12

Specific Identification -
Illustration
Entity A has the following inventories as of 28 February 2021:
CAR 123 Php10,000 - Cost of Sales
CAR 124 Php11,000 - Ending Inventory
CAR 125 Php12,000 - Ending Inventory
On 28 March 2021, CAR 123 is sold.
Required: How much is the Ending Inventory as of March 31,
2021?
Ending Inventory 23,000
13

13

6
 2/20/2023

First-In, First-Out (FIFO)

It is assumed that inventories that were purchased or

produced first are sold first, and therefore unsold
inventories at the end of the period are the most recently
purchased or produced.
• Cost of Sales – represents the cost of inventories that were
purchased first
• Ending Inventory – represents the cost of the latest
purchases

14

14

First-In, First-Out (FIFO) -

Illustration
Entity A, a trading entity, buys and sells Product A.
Movements in the inventory of Product A during the
period are as follows:
Date Transaction Units Unit Cost Total Cost
Jan 1 Beginning Inventory 100 Php 10 Php1,000
7 Purchase 300 12 3,600
12 Sale 320
21 Purchase 200 14 2,800

Required: Compute for the Ending Inventory and Cost of

Sales using the FIFO cost formula 15

15

7
 2/20/2023

First-In, First-Out (FIFO) -

Illustration
Date Transaction Units Unit Cost Total Cost
Jan 1 Beginning Inventory 100 Php 10 Php1,000
7 Purchase 300 12 3,600
12 Sale 320
21 Purchase 200 14 2,800

COST OF ENDI NG INVENTORY COST OF SALES

Date Transaction Units Date Transaction Units Unit Cost Total Cost
Jan 01 Beginning Inventory 100 Jan 01 Beginning Inventory 100 10 1,000
Jan 07 Purchase 300 Jan 07 Purchase 300 12 3,600
Jan 12 Sales -320 Jan 21 Purchase 200 14 2,800
Jan 21 Purchase 200 Total Goods Available for Sale 600 7,400
Ending Inventory (in units) 280 Less: Ending Inventory -280 - 3,760
Cost of Sales 320 3,640
Units Unit Cost Total Cost
from Jan 21 purchase 200 14 2,800
from Jan 7 purchase (280-200) 80 12 960
Ending Inventory (at Cost) 3,760

Date Transaction Units Unit Cost Total Cost

Jan 01 Beginning Inventory 100 10 1,000
Jan 07 Purchase 300 12 3,600
Jan 21 Purchase 200 14 2,800
Total Goods Available for Sale 600 7,400
Less: Ending Inventory -280 - 3,760
Cost of Sales 320 3,640 16

16

Weighted Average Cost

Cost of Sales and Ending Inventory are determined based

on the weighted average cost of beginning inventory and
all inventories purchased or produced during the period.
Total Goods Available for Sale (TGAS) in
Weighted Average Pesos
Cost = Total Goods Available for Sale (TGAS) in
Units

The average may be calculated on:

• Periodic basis
• Each additional purchase is made (moving average) 17

17

8
 2/20/2023

Weighted Average Cost -

Illustration
Entity A, a trading entity, buys and sells Product A. Movements in
the inventory of Product A during the period are as follows:
Date Transaction Units Unit Cost Total Cost
Jan 1 Beginning Inventory 100 Php 10 Php1,000
7 Purchase 300 12 3,600
12 Sale 320
21 Purchase 200 14 2,800

Required: Compute for the Ending Inventory and Cost of Sales

using the weighted average cost formula. The average is
calculated on periodic basis
18

18

Weighted Average Cost -

Illustration
Date Transaction Units Unit Cost Total Cost
Jan 1 Beginning Inventory 100 Php 10 Php1,000
7 Purchase 300 12 3,600
12 Sale 320
21 Purchase 200 14 2,800

COST OF ENDING INVENTORY COST OF SALES

Date Transaction Units Unit Cost Total Cost Date Transaction Units Unit Cost Total Cost
Jan 01 Beginning Inventory 100 10 1,000 Jan 01 Beginning Inventory 100 10 1,000.00
Jan 07 Purchase 300 12 3,600 Jan 07 Purchase 300 12 3,600.00
Jan 21 Purchase 200 14 2,800 Jan 21 Purchase 200 14 2,800.00
Total Goods Available for Sale 600 7,400 Total Goods Available for Sale 600 7,400.00
Less: Ending Inventory -280 - 3,452.40
TGAS in Pesos 7,400 Cost of Sales 320 3,947.60
Divided by: TGAS in units 600
Weighted Average Unit Cost 12.33

Ending Inventory (in units) 280

Weighted Average Unit Cost 12.33
Ending Inventory (at Cost) 3,452.40

19

19

9
 2/20/2023

Weighted Average Cost -

Illustration
Entity A, a trading entity, buys and sells Product A. Movements in
the inventory of Product A during the period are as follows:
Date Transaction Units Unit Cost Total Cost
Jan 1 Beginning Inventory 100 Php 10 Php1,000
7 Purchase 300 12 3,600
12 Sale 320
21 Purchase 200 14 2,800

Required: Compute for the Ending Inventory and Cost of Sales

using the weighted average cost formula. The average is
calculated using moving average.
20

20

Weighted Average Cost -

Illustration
Date Transaction Units Unit Cost Total Cost
Jan 1 Beginning Inventory 100 Php 10 Php1,000
7 Purchase 300 12 3,600
12 Sale 320
21 Purchase 200 14 2,800

COST OF ENDING INVENTORY COST OF SALES

Date Transaction Units Unit Cost Total Cost Units Sold 320
Jan 01 Beginning Inventory 100 10.00 1,000 Weighted Average Unit Cost 11.50
Jan 07 Purchase 300 12.00 3,600 Cost of Sales 3,680.00
400 11.50 4,600
Jan 12 Sales -320 - 3,680
Jan 21 Purchase 200 14.00 2,800
Total Goods Available for Sale 280 3,720

TGAS in Pesos 4,600

Divided by: TGAS in units 400
Weighted Average Unit Cost 11.50

21

21

10
 2/20/2023

Net Realizable Value

is the estimated selling price in the ordinary course

of business less the estimated costs of completion
and the estimated costs necessary to make the sale. (PAS
2.6)

22

22

Write down of Inventories

• Inventories are usually written down to net realizable

value on an item by item basis.
• If the cost of an inventory exceeds its NRV, the
inventory is written down to NRV, the lower amount.
The excess of cost over NRV represents the amount of
write-down.

23

23

11
 2/20/2023

Write down of Inventories -

Illustration
Information on Entity A’s inventories is as follows:
Product A Product B
Cost 100,000 200,000
Estimated selling price 140,000 220,000
Estimated costs to sell 20,000 30,000

Requirement: Compute for the valuation of Product A

and B in Entity A’s statement of financial position.
24

24

Write down of Inventories -

Illustration
Product A Product B
Cost 100,000 200,000
Estimated selling price 140,000 220,000
Estimated costs to sell 20,000 30,000
LOWER OF COST AND NRV
Product A Product B
Cost 100,000 200,000

Estimated selling price 140,000 220,000

Estimated costs to sell - 20,000 - 30,000
Net Realizable Value (NRV) 120,000 190,000

Lower 100,000 190,000

Amount of write-down - 10,000 25

25

12
 2/20/2023

Reversal of write-downs

The amount of reversal to be recognized should not

exceed the amount of the original write-down previously
recognized.

26

26

Reversal of write-downs -
Illustration
Information on Entity A’s inventories is as follows:
Product A Product B
Cost 100,000 200,000
Estimated selling price 140,000 220,000
Estimated costs to sell 20,000 30,000
Assume that in a subsequent period, NRV of Product B increases:
Cost is 80,000 and Net Realizable Value is 100,000.

Requirement: Compute for the valuation of Product A and B in

Entity A’s statement of financial position.
27

27

13
 2/20/2023

Reversal of write-downs -
Illustration
Product A Product B
Cost 100,000 200,000
Estimated selling price 140,000 220,000
Estimated costs to sell 20,000 30,000
Assume that in a subsequent period, NRV of Product B increases: Cost is
80,000 and Net Realizable Value is 100,000.
Year 1 Year 2
Product B Product B
Cost 200,000 Net Realizable Value (NRV) 100,000

Estimated selling price 220,000 Cost 80,000

Estimated costs to sell - 30,000 Change 20,000
Net Realizable Value (NRV) 190,000 Less: Orginal Write-down 10,000
Increase in value 10,000
Lower 190,000
Amount of write-down 10,000 Cost 80,000
Reversal of write-downs 10,000
AMOUNT OF INVENTORY 90,000 28

28

Write-down of Raw Materials

Inventory
Raw Materials inventory is not written down below cost
if the finished goods in which they will be incorporated
are expected to be solve at above the cost.
The best evidence of NRV of raw materials is
replacement cost.

29

29

14
 2/20/2023

Write-down of Raw Materials

Inventory - Illustration
Information on Entity A’s inventories is as follows:
Raw Finished
Materials Goods
Cost 60,000 100,000
Replacement cost/NRV 50,000 120,000

Requirement: Compute for the valuation of the inventories in

Entity A’s statement of financial position.c
Total Cost of Inventories = Php160,000
NRV of the finished goods exceeds the cost 30

30

Recognition as an expense

• The carrying amount of an inventory that is sold is

charged as expense (i.e., cost of sales) in the period in
which the related revenue is recognized.
• The write-down of inventories to NRV and all losses of
inventories are recognized as expense in the period the
write-down or loss occurs.

31

31

15
 2/20/2023

Disclosures

a. accounting policy for inventories

b. carrying amount, generally classified as merchandise, supplies,
materials, work in progress, and finished goods. The classifications
depend on what is appropriate for the entity
c. carrying amount of any inventories carried at fair value less costs
to sell
d. amount of any write-down of inventories recognised as an expense
in the period
e. amount of any reversal of a write-down to NRV and the
circumstances that led to such reversal
f. carrying amount of inventories pledged as security for liabilities
g. cost of inventories recognized as expense (cost of goods sold). 32

32

16