MODULE 2 Cost of Agricultural Produce Harvested from

Inventories Biological Assets

Scope of IAS 2
IAS 2 Inventories applies to all inventories except
1. Financial instruments (IFRS 9); and
2. Biological assets related to agriculture
activity and agricultural produce up to the
point of harvest (IAS 41).
Definition of Inventories
Inventories are assets
● Held for sale in the ordinary course of
business (merchandise inventory/finished
goods inventory);
● In the process of production for such sale
(WIP Inventory); or
● In the form of materials or supplies to be
consumed in the production process or in
the rendering of services (raw materials
and supplies).
Initial Measurement of Inventories
Inventories are measured on its initial recognition
at cost. The cost of inventories shall comprise all
cost of purchase, cost of conversion, and other
costs incurred in bringing the inventories to its
present location and condition.
Cost of Purchase costs include import duties and
Purchase irrecoverable purchase taxes, and transport,
handling and other directly attributable
costs, less trade discounts/rebates.
Cost of DIrect labor and systematic allocation of
Conversion fixed production overhead (based on normal
capacity) and variable production overhead
(based on actual use).
Other Other costs such as non-production
Costs overhead necessary to bring the asset to its
present location and condition.
Exclusion from Cost of Inventories
1. Abnormal amounts of wasted materials,
labor or other production costs.
2. Storage costs, unless those costs are
necessary in the production process.
3. Administrative overheads that do not
contribute to bringing inventories to their
present location or condition;
4. Selling costs;
5. Profit margins or non-attributable
overheads that are often factored into
prices charged by service providers.
6. Borrowing costs incurred in connection
with the acquisition of inventory unless the
inventory is a qualifying asset.
● The deemed cost of inventories
comprising agricultural produce harvested
from biological assets is the fair value less
lost to sell at the point of harvest.
Whose Inventory is it?
Goods in Transit
● FOB Seller - ownership changes at
shipping point,
● FOB Buyer - ownership changes at
destination.
Maritime Shipping Terms
● Free Alongside
○ Buyer bears the cost of loading and
shipment.
○ Title passes to the buyer when the
carrier takes possession of the
goods.
● Cost, Insurance, and Freight
○ Until the goods are fully loaded, the
seller bears the cost of any loss or
damage to the product.
● Ex-Ship
○ The seller bears all expenses and
risk of loss until the goods are
unloaded at which time title and
risk of loss pass to the buyer.
Goods on Consignment
● Goods are included in the inventory of the
consignor (company delivering the goods)
at cost plus the handling and shipping
costs incurred in the delivery of the goods
to the consignee (the company receiving
and selling the goods).
Special Order Goods
● Goods manufactured according to
customer specifications are considered
sold when completed and therefore
excluded from the seller's inventory, even if
the goods are still in the seller's possession.
Conditional Sales
● Goods in the possession of others such as
goods in the hands of salespersons and
agents, goods held by customers on
approval, and goods held by others for
storage, processing or shipment, are part
of the inventory of the entity that owns the
goods.
Installment Sales
● Goods sold on an installment basis are
recorded as sold when delivered and
excluded from the inventory of the seller.

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Goods Sold with Buyback Arrangements and Illustration
Goods Sold with Refund Offers Moon Trading presented the following
● Goods sold with buyback arrangements information in relation to the purchase of
are in effect used as collateral for a loan. inventory:
The goods are included in the ending
inventory of the transferor.
● Sellers of goods sold with refund offers
Purchase price P3,000,000 ✅
recognize revenue for the transferred rebates 45,000 ✅ deduct
products. The recognition of revenue
implies that the goods are removed from Import duties 125,000 ✅ add
the inventory of the seller at their carrying
amount.
Freight-in 55,000 ✅ add
Interest on bank loan 100,000 🆇 ignore
Lay Away Plans and Bills and Hold Sales
For law away plans and bill and hold sales, seller
recognizes revenue when the customer obtains The proceeds of the bank loan were used to pay
control over the product, that is these conditions for the inventory purchased. What is the
are met: inventoriable cost of purchase? P3,135,000
1. the product is identified separately as
already belonging to a customer; Illustration
2. the product must be ready for transfer to Sky Trading incurred the following costs in
the customer; and relation to a certain product it manufactured
3. the seller does not have the ability to use
the product or to direct it to another
customer. Direct materials and labor P1,000,000 ✅
The recognition of revenue is made simultaneous Variable overhead 350,000 ✅ add
to the derecognition of inventory.
Fixed overhead 500,000 ✅ add
Illustration Factory admin. expense 150,000 ✅ add
Determine whether the following items will be
included in the inventory Storage cost of finished goods 200,000 🆇 ignore

Goods displayed in the store ✅

Goods stocked in the warehouse not covered by any
sales contract
✅ What is the inventoriable cost of the product?
P2,000,000

Goods purchased, in transit, FOB Seller ✅ Illustration

The Orient Training's inventory at the end 9,500,000
Goods purchased, in transit, FOB Destination 🆇 of 2020 is P9,500,000. Included in the

Freight cost on goods purchased ✅ amount are the following:

Goods held on consignment 🆇

1. Merchandise in transit, purchased FOB
shipping point, P680,000.
✅
Goods out on consignment ✅ 2. Merchandise in transit, purchased FOB (420,000)

✅
destination, P420,000.
Goods out to customers on approval

✅
3. Goods held on ignment, P500,000. (500,000)
Goods in the hands of salesmen

Goods sold with buyback arrangements
Unused factory supplies and materials
✅
4. Goods out on s out on consignment, (200,000)
P610,000, which includes the P10,000
delivery charge and 50% markup on cost.
✅ 600,000 - (600,000/1.5) = 200,000

Goods which require additional processing ✅ The P9,500,000 balance does not include
the following:
Storage costs of goods in process ✅ 1. Merchandise in transit to customer, FOB ✅
Insurance premium paid on finished goods 🆇 shipping point, at selling price of P540,000,
which includes 40% markup on selling
price.
Freight paid on goods sold 🆇

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 2. Merchandise in transit to customer, FOB
destination, at selling price of P400,000,
which includes 40% markup on selling
price.
3. Merchandise purchased, in transit, with
terms "Free alongside", costing P150,000;
and
240,000
Star Trading had the following transactions
during the current year: beginning inventory, 100
units @ P6; purchases, 900 units @ P6; and sales,
600 units @ P12. The physical count at year end
indicated 350 units @ P6 were on hand.
150,000

4. Merchandise sold in transit, with terms

Cost, Insurance, Freight, costing P120,000.
✅
What is the correct amount of inventory? P8,770,000

Inventory Accounting Systems

1. Periodic system. Under this system, a Cost Flow Assumption
company does not maintain a continuous
record of the physical quantities or costs of
inventory on hand. It determines the
quantity of inventory by conducting a
physical inventory at the end of the period.
Movements in inventories are charged to
accounts Purchases, Purchase returns,
Purchase discounts, and Freight-in.
Cost Formulas
2. Perpetual system. Under this system, a 1. The cost of inventories of items that are
company continuously tracks changes in not ordinarily interchangeable and goods
the inventory account. That is, all or services produced and segregated for
purchases and sales of goods are recorded specific projects shall be assigned by using
directly in the inventory account as they specific identification of their individual
occur. At the end of the period, because costs.
the inventory account is updated, no 2. The cost of inventories of items that are
adjusting entry is necessary to set up the ordinarily interchangeable shall be
ending inventory. assigned by using the first-in, first-out
(FIFO) or weighted average cost formula.
Comparison of the Inventory Accounting
Systems Illustration
Seawater Co. had the following inventory
Transaction Periodic System Perpetual System
transactions during 2020:
Purchase of goods Purchases Inventory
A/P or Cash A/P or Cash
Transaction Units Unit Cost Selling
Purchase return AP or Cash A/P or Cash
Price
Purchase return Inventory
January 1 balance 250 P10.50
Sale of goods A/R or Cash A/R or Cash
Sales Cost of Sales March 7, purchase 200 11.00
Sales
Inventory
May 7, sale 120 P14.00
Sales return Sales return Sales return
A/R or Cash Inventory June 30, sale 55 15.00
A/R or Cash
Cost of Sales July 15, purchase 275 11.75

Yearned adjusting Inventory, end none September 17, sale 250 16.00
entry to set-up Cost of sales
ending inventory and Inventory, beg
close beginning Purchases
inventory Determine the cost of ending inventory, cost of
sales, and gross profit using the three cost
Shortage of inventory none Inventory short/over formulas
(difference of Inventory
perpetual record and Specific Identification (assume May 20 sales
physical inventory) originated from March 7 purchase; June 30 sales
Illustration

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from January 1 balance; and September 17 sale Weighted Average (periodic average)
from July 15 purchase): WAUC = TCGAS/TUAS = P8,056.25 / 725 = P11.11

Cost of ending inventory (300 units): Cost of ending inventory (300 units):
Jan 1 195 x P10.50 = P2,047.50 300 x P11.11 = P3,333.00

Mar 7 80 x P11.00 = P880.00 Cost of Sales (425 units):

P8,056.25 - P3,333.00 = P4,723.25
Jul 15 25 x P11.75 = P293.75 P3,221.25

Gross Profit
Cost of Sales (425 units): Sales May 20 120 x P14.00 = P1,680.00
May 20 120 x P11.00 = P1,320.00
Jun 30 55 x P15.00 = P 825.00
Jun 30 55 x P10.50 = P577.50
Sep 17 250 x P16.00 = P4,000 P6,505.00
Sep 17 250 x P11.75 = P2,937.50 P4,835.00
COS (P4,723.250
)
Gross Profit
GP P1,781.75
Sales May 20 120 x P14.00 = P1,680.00

Jun 30 55 x P15.00 = P 825.00

Moving Average (perpetual average)
Sep 17 250 x P16.00 = P4,000 P6,505.00

COS (P4,835.00) Date Units Total

GP P1,670.00
Jan 1 250 x P10.50 P2,625.00

Mar 7 200 x P11.00 2,200.00

First in, First Out (FIFO)
Cost of ending inventory (300 units): Total 450 x P10.72 4,825.00
Jul 15 275 x P11.75 = P3.231/25
May 20/Jun 30 (175) x P10.72 (1,876.00)
Mar 7 25 x P11.00 = P275.00 P3,506.25
Balance 275 x P10.72 2,949.00

Cost of Sales (425 units): Jul 15 275 x P10.72 3,231.25

Jan 1 250 x P10.50 = P2,625.00
Total 550 x P11.24 6,180.25
Mar 7 175 x P11.00 = P1,925.00 P4,550.00
Sep 17 250 x P11.24 (2,810.00)

Gross Profit Dec 31 300 x P11.24 P3,370.25

Sales May 20 120 x P14.00 = P1,680.00

Jun 30 55 x P15.00 = P 825.00

Cost of Sales = P1,876.00 + P2,810 = P4,686.00

Sep 17 250 x P16.00 = P4,000 P6,505.00 Gross Profit = P6,505.00 - P4,686.00 = P1,819.00
COS (P4,550.00)

GP P1,955.00

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Measurement of Inventories Subsequent to
Initial Recognition
Inventories shall be measured at the lower of
COST and NET REALIZABLE VALUE item by item.
● Cost - all cost of purchase, cost of
conversion and other costs incurred in
bringing the inventories to its present
location and condition.
● 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.
Illustration
Based on a physical inventory taken on December
31, 2019, Hersh, Inc. determined its chocolate
inventory at P26,000. Hersh estimated that, after
further processing. costs of P12,000, the chocolate
could be sold as finished candy bars for P40,000.
Hersh's normal profit margin is 10% of sales. What
amount should Hersh report as chocolate
inventory on its December 31, 2019 statement of
financial position?
Cost P26,000 ✅
NRV (P40,000 - P12,000) P28,000
Illustration
The following information is available for the
Century Trading:

Recognition as an expense
1. When inventories are sold, the carrying
amount of those inventories shall be
recognized as an expense in the period
in which the related revenue is
recognized.
Determine the:
2. The amount of any write-down of
1. Value of the total inventory to be
inventories net realizable value and all
presented in the statement of financial
losses of inventories shall be recognized as
position. - P845,800
an expense in the period the write down or
loss occurs.
3. The amount of any reversal of any
write-down of inventories, arising from an
increase in net realizable value, shall be
recognized as a reduction in the amount
of inventories recognized as an expense in
the period in which the reversal

Recording of Write Down of Inventory

Direct Method - ending inventory is recorded 2. Amount of write down of inventory to NRV.
directly at the lower of cost and net realizable - P29,000
value.

Ending Inventory lcnrv

Income Summary lcnrv

Allowance Method - ending inventory is recorded

at cost. Any write down to the net realizable value
Direct Method:
is recorded using a separate valuation account.
Inventory 845,000
Income Summary 845,000
Ending Inventory cost
Income Summary cost
Allowance Method:
Ending Inventory 874,800
Loss of IWD xx
Income Summary 874,800
Allowance for IWD xx
Loss of IWD 29,000
Allowance for IWD 29,000

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Illustration Allowance Method:
De Chaves Company reported the following
figures at the end of each year (in thousand
pesos)

Present Statement of P/L using the direct and

allowance method.

Direct Method:

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Inventory Estimation Methods Illustration
Beginning Inventory xx DEC Company’s records revealed the following:
Purchases xx
Total Cost of GAS xx*
Ending Inventory (xx)
Cost of Goods Sold xx

*based on perpetual records or physical inventory

The physical inventory conducted at year end
What if physical inventory is impractical or
revealed that P500,000 was in the company's
impossible? → Estimate
warehouse. However, the company president
suspects that some employees may have pilfered
some inventories. Determine the cost of missing
1. Gross Profit Method. Also called gross margin
inventory if there is any of gross profit rate is [a]
method, this method estimates the cost of
40% of sales and [b] 40% of cost of sales.
ending inventory using the assumed relationship
between gross profit and sales or gross profit and
cost of sales. However, this method is not allowed
for annual financial statement purposes.

2. Retail Inventory Method. Often used in the

retail industry, this method estimates the cost of
ending inventory by applying the cost-to-retail
ratio to the ending inventory at retail price. This
method requires entities to maintain records of
both the cost and retail price or selling price of
purchases.

Gross Profit Method

Based on Sales / Net Sales

● Cost of Sales = Net Sales x (100% - gross
profit rate)

Illustration
On May 6, 2020, a flash flood caused damage to
the merchandise stored in the warehouse of
Manuel Company. You were asked to submit an
estimate of the merchandise destroyed in
Based on Cost of Sales warehouse.
● Cost of Sales = Net Sales (100% + gross
profit rate) The following data were established: 2019 net
sales were P8 million matched against cost of P5.6
million.

Merchandise inventory on January 1, 2020 was P2

million, 90% of which was in the warehouse and
the remaining 10% in the downtown showroom.
From January 1, 2020 to date of flood, you
ascertained the following: invoice value of
purchases (all stored in the warehouse), P1 million;
freight-in, P40,000; purchase return, P60,000; cost
of merchandise transferred from the warehouse
to the showroom was P80,000 and net sales from

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January 1 to May 6, 2020 (all warehouse stock) was
P3.2 million.
Assuming gross profit rate in 2020 to be the same
as in 2019, what was the estimated cost of
merchandise destroyed by the flood?
Retail Inventory Method
Cost-to-Retail Ratio
Illustration
Chic Department Store uses the retail inventory
method. At the end of June 2020, the records of
the store provided the following:
Determine the cost of goods sold and ending
inventory under FIFO cost basis and average cost
basis.
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Illustration
London Company uses the retail method of
inventory valuation. The following information is
available

Determine the cost of goods sold and ending

inventory under the FIFO and average cost basis

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