INTERMEDIATE AACCOUNTING 1 them.
It covers all materials used in the
FINALS part 4
INVENTORIES
Inventories are assets held for sale in the
ordinary course of business, in the process of
production for such sale or in the form of
materials or supplies to be consumed in the
production process or in the rendering of
services.
Inventories encompass goods purchased and
held for resale, for example:
a. Merchandise purchased by a retailer
and held for resale.
b. Land and other property held for resale
by a subdivision entity and real estate
developer.
CLASSES OF INVENTORIES:
Inventories of a trading concern – is one that
buys and sells goods in the same form
purchased. The term “merchandise inventory”
is generally applied to goods held by a trading
concern.
- Buy and sell only, walang babaguhin sa
physical structure ng product.
Inventories of a manufacturing concern – one
that buys goods which are altered or converted
into another form before they are made
available for sale. (Bumibili ng raw materials
para makagawa ng panibagong product). This
includes:
a. Finished Goods – completed products
which are available for sale. Have been
assigned their full share of
manufacturing costs.
b. Goods in process- or work in process
are partially completed products which
require further process or work before
they can be sold.
c. Raw materials – are goods that are to
be used in the production process. No
work or process has been done for
them as yet by the entity inventorying
manufacturing operations. However,
raw materials are restricted to materials
that will be physically incorporated in
the production and which can be
directly traced to the end product.
d. Factory or manufacturing supplies –
referred to as indirect materials. They
are not physically incorporated in the
products being manufactured because
the amount involved are insignificant. It
is part of the manufacturing overhead.
Included in the inventory:
a. Goods owned and on hand
b. Goods in transit and sold FOB
destination
c. Goods in transit and purchased FOB
shipping point
d. Goods out on consignment
e. Goods in the hands of salesmen or
agents
f. Goods held by customers on approval
or on trial.
FREIGHT OUT – SELLER
FREIGHT IN – BUYER
FREIGHT COLLECT – BUYER
FREIGHT PREPAID – SELLER
FOB DESTINATION – SELLER
FOB SHIPPING – BUYER
MARITIME shipping terms
FAS or free alongside – A seller who ships FAS
must bear all the expenses and risk involved in
delivering the goods to the dock next to or
alongside the vessel on which the goods are to
be shipped. The buyer bears the cost of loading
and shipment and thus, title passes to the
buyer when the carrier takes possession of the
goods.
- SELLER
CIF or Cost, insurance and freight – the buyer
agrees to pay in a lump sum the cost of the
goods, insurance cost and freight charge. The
seller must pay for the cost of loading. Thus,
title and risk of loss shall pass to the buyer upon
delivery of the goods to the carrier.
- BUYER (during the travel)
Ex ship - A seller who delivers the goods ex-ship
bears all the expenses and risk of losses until
the goods are unloaded at which time title and
risk of loss shall pass to the buyer.
- Seller habang nag tatravel pero pag
nababa na si buyer na
Consignment – a method of marketing goods in
which the owner called the assignor transfers
physical possession of certain goods to an agent
called consignee who sells them on the owner’s
behalf.
To record the remittance from consignee:
Cash xx
Commission xx
Advertising xx
Sales xx
Measurement of inventory:
- Inventories shall be measured at the
lower cost and net realizable value
LCNRV
Initial Measurement – COST:
1. Cost of purchase – compromises the
purchase price, import duties and
irrecoverable taxes, freight, handling
and other costs directly attributable to
the acquisition of finished goods,
materials and services.
- Trade discounts, rebates and other
similar items are deducted in
determining the cost of purchase. It
shall not include foreign exchange
differences which arise involving a
foreign currency.
- When inventories are purchases with
deferred settlement terms, the
difference between the purchase price
for normal credit terms and the amount
paid is recognized as interest expense
over the period of financing.
Inaadd para makuha yung total inventory:
 Purchase price +
o Others that are directly
included in price but is not
recognized as expense.
 Import duties: na dapat bayaran para
makapag import ng goods. +
 Irrecoverable taxes – hindi napapasa +
 Freight cost +
 Handling cost +
 Directly attributable cost +
 Trade discounts (not cash discounts)
 Rebates
Hindi inaadd or sinusbutract:
 Foreign exchange differences
 Interest expense over the financing
period
2. Cost of conversion – inventories include
cost directly related to the units of
production such as direct labor. It also
includes a systematic allocation of fixed
and variable production overhead that
is incurred in converting materials in
finishes goods. (Cost of inputs to
outputs)
Fixed production overhead (FMOH)– is the
indirect cost of production that remains
relatively constant regardless of the volume of
production.
Examples: depreciation and maintenance of
factory building and equipment and the cost of
factory management and administration.
Variable production overhead (VMOH) – is the
indirect costs of production that varies directly
with the volume of production.
Examples: indirect labor and indirect materials.

 Direct Labor +
 Overhead (Fixed and Variable) +
o Factory expenses
o Indirect Materials
o Indirect Labor
3. Other costs – is included in the cost of
inventories only to extent that it is
incurred in bringing the inventories to
their present location and condition.
The following costs are excluded from the cost
of inventories and recognized expenses in the
period when incurred:
a. Abnormal amounts of wasted materials,
labor and ither production costs
b. Storage costs unless necessary (thus, FG
and WIP are expensed)
c. Administrative overheads that do not
contribute to bringing inventories
d. Distribution or selling costs.
Subsequent Measurement – LCNRV (Lower of
cost and net realizable value)
Net realizable value:
- Is the estimated selling price in the
ordinary course of business less the
estimated cost of completion and the
estimated cost of disposal.
NRV = SP – cost to complete cost – cost to
sell
- The cost of inventories may not be
recoverable under following
circumstances:
1. The inventories are damaged
2. Inventories have become wholly or partially
obsolete
3. The ceiling prices have declined
4. The estimated cost of completion or the
estimated cost of disposal has increased.
General Rule:
COST > NRV – with inventory writedown
Cost < NRV – no inventory writedown
Note: if the net realizable value is lower than
cost, the inventory is measured at net realizable
value and the decrease in value is recognized.
Accounting methods:
DIRECT METHOD or COGS METHOD – the
inventory is recorded at the lower cost or net
realizable value.
- Any loss on inventory write down is not
accounted for separately but buried in
the COGS.
Recorded at the lower cost
Inventory- YE xx
Income summary xx
ALLOWANCE METHOD – inventory is recorded
at cost and any loss on inventory writedown is
accounted for separately.
- This method is also known as loss
method because a loss account “loss on
inventory write down” is debited and a
valuation account “allowance for
inventory writedown” is credited.
- If the requires allowance increases, an
additional loss is recognized
- If the required allowance decreases a
gain or reversal of inventory writedown
is recorded. But the gain is limited only
to the extent of the allowance balance.
Cost – December 31 this year xx
Net realizable value (xx)
Inventory writedown xx
Recorded at the cost
Inventory- YE xx
Income summary xx
Loss in inventory writedown
Loss in IWD xx
Allowance for IWD xx
 recorded. (kapag tumaas yung market
Inventory YE xx price sa time kung kelan bumili mismo
Allowance for IWD (xx) yung entity ng goods, may gain na
Net realizable value xx irerecognize pero nakalimit lang kung
magkano yung previously nirecord na
loss)
Purchase commitments – are obligations of the Purchases xx
entity to acquire certain goods in the future at a Estimated Liability for purchase commitment xx
fixed price and fixed quantity Accounts Payable xx
Nag promise si entity na mag acquire ng goods Gains on purchase commitments xx
at a later date with fix na quantity and price
kumbaga may deal na.
STATEMENT PRESENTATION:
- Disclosure is required
- Inventories are generally classified as
- If there is a decline in purchase price after a
current assets
purchase commitment has been made, a
- Shall be presented as one line item in
loss is recorded in the period of the price
the SFP but details must be disclosed in
decline (Kapag bumaba yung purchase
the notes
price pagkatapos magkaroon ng
TWO SYSTEMS IN ACCOUNTING INVENTORIES:
commitment, may irerecord na loss sa
Periodic System – calls for the physical counting
period kung kelan nag decline yung price.)
of goods in hand at the end of the accounting
- It must be noncancellable.
period to determine quantities. Quantities are
then multiplied by the corresponding unit costs
If at YE, the purchase price falls below the
to get the inventory value for balance sheet
agreed price:
proposes, this approach gives actual or physical
loss on purchase commitments xx inventories.
estimated liability xx - It is generally used when the individual
When the actual purchase is made in the inventory items have small peso
subsequent period and the current investment such as groceries, hardware
replacement cost drops (bumaba nan ga yung and auto parts
price after purchase commitment tapos nung
ipupurchase na talaga yung goods in actual To record purchase of merchandise account:
bumaba ulit) Purchases xx
Purchases xx Accounts Payable xx
Loss on purchase commitment xx
estimated liability for purchase commitment xx Payment of freight on the purchase:
Accounts Payable xx Freight in xx
Cash xx
LCNRV adaptation
- If the market price rises by the time the Return of merchandise purchased to supplier:
entity makes the purchase, a gain on Accounts Payable xx
purchase commitment would be Purchase Return xx
recorded. But the amount of gain to be
recognized is limited to the loss on
purchase commitment previously
Sale of merchandise on account Sale of merchandise on account- always with
Accounts Receivable xx cost
Purchase return xx Accounts Receivable xx
Sales xx
Return of merchandise sold from customer Cost of Goods sold xx
Sales Return xx Merchandise inventory xx
Accounts Receivable xx
Return of merchandise sold from customer
Adjustment of ending inventory Sales Return xx
Merchandise inventory – end xx Accounts Receivable xx
Income Summary xx Merchandise inventory xx
Cost of goods sold xx
Perpetual system – requires maintenance of
record called stock cards that usually offer a Adjustment of ending inventory - not adjusted
running summary of the inventory inflow and since inuupdate sya maya maya.
outflow.
- Inventory increased and decreased are To account the inventory shortage/overage (if
reflected in the stock cards and the di nag mamatch yung physical count sa
resulting balance represents the records):
inventory. This approach hives book or Inventory shortage/overage xx
perpetual inventories. Merchandise inventory xx
- Procedure is commonly used where the
inventory items treated individually DISCOUNTS:
represent a relatively large peso Trade Discounts – deductions from list catalogs,
investment such as jewelry and cars. not recorded in books (nakikita sa malls ganon,
- Lahat ng purchases, freight in, naka deduct na yung discounts a mismong
purchase returns and allowances product)
papalitan ng merchandise inventory. - Purpose is to encourage sale
Cash Discounts – deductions from invoice
To record purchase of merchandise prices when payment is made withing the
account: discount period (to encourage the customers to
Merchandise inventory xx pay in full amount promptly)
Accounts Payable xx - Purpose is to encourage prompt
payment
Payment of freight on the purchase:
Merchandise inventory xx METHODS IN PURCHASING:
Cash xx Gross Method – Purchases and accounts
payable are recorded at gross (nirerecord yung
discount kung kelan nya binayaran)
Return of merchandise purchased to supplier:
- most entities record purchases at gross
Accounts Payable xx
invoice amount. It is supported on
Merchandise inventory xx
practical grounds
 - It is more convenient than the net - PAS 2 expressly provides that the cost
method from bookkeeping but it violate of inventories shall be determined by
the matching principle. using:
a. First in first out (FIFO)
To record purchases: b. Weighted average
Purchases 200,000 - The standard does not permit anymore
Accounts Payable 200,000 the use of the last in first out (LIFO)
method as an alternative formula in
Assume payment is made within the discount measuring cost of inventories.
period:
Accounts Payable 200,000 FIRST IN FIRST OUT METHOD (FIFO)
Cash 196,000 - Assumes that the goods first purchases
Purchase Discount 4,000 are first sold and consequently the
goods remaining in the inventory at the
end of the period are those most
Assume payment is made beyond the discount
recently purchased or produced
period:
- It is in accordance with the ordinary
Accounts Payable 200,000
merchandising procedure that the
Cash 200,000
hoods are sold in the order they are
purchased.
Net Method - Purchases and accounts payable - There is improper matching of cost
are recorded at net (binawas na agad yung against revenue
discount sa una palang) - Can be FIFO periodic or perpetual
- Represents the cash equivalent price on - In perpetual, it requires preparation of
the date of payment and so it is stock cards
theoretically correct.
To record purchases:
Beginning inventory xx
Purchases 196,000 Purchases xx
Accounts Payable 196,000 Goods available for sale xx
Inventory ending (xx)
Assume payment is made beyond the discount Cost of goods sold xx
period:
Accounts Payable 196,000 Weighted Average (Periodic)
Cash 196,000
Beginning Inventory xx
Assume payment is made beyond the discount Total cost of purchases xx
period: xx
Accounts Payable 196,000 Divided by:
Purchase Discount lost 4,000 (Total units purchases + total
Cash 200,000 Units in the beg inventory) xx
Weighted average unit cost xx

Weighted average unit cost x units on hand =

INVENTORY COST FLOW inventory value

Average unit cost = total cost of goods available
for sale/total number of units available for sale
Weighted Average (Perpetual)
- When used in conjunction with the
perpetual system, the weighted average
method is popularly known as the
moving average method.
- New weighted average unit cost must
be computed after every purchase and
purchase return.
New weighted average = Total COGAS after
every purchase/total unit available for sale
Inventory cost = new weighted average x units
on hand
SPECIFIC IDENTIFICATION METHOD:
- Means that specific costs are attributed
to identified items of inventory
- This requires record which clearly
determine the actual cost of goods on
hand.
- This method is appropriate for
inventories that are segregated for a
specific project and inventories that are
not ordinarily interchangeable.
- This method may be used in either
periodic or perpetual inventory system.
- The major argument for this method is
that the flow of the inventory cost
corresponds with the actual physical
flow of goods.
- With this method, there is actual
determination of cost of units sold and
on hand.
cost of that inventory = Unit on hands x
actual unit cost
STANDARD COSTS:
- Are predetermined product costs
established on the basis of normal
levels of materials and supplies, labor,
efficiency and capacity utilization.
- It is predetermined is applied to all
inventory movements, inventories,
goods available, purchases and goods
sold or placed in production.
- This method may be used for
convenience if the results approximate
cost.
GROSS PROFIT METHOD
Reasons for making an estimate of the cost of
the goods on hand are:
a. The inventory is destroyed by fire and
other catastrophe, or theft of the
merchandise has occurred, and the
amount of inventory is required for
insurance purposes.
b. A physical count of the goods on hand is
made and it is necessary to prove
correctness or reasonableness if such
count by making an estimate. This is
known as the gross profit test in the
accounting parlance.
c. Interim financial statements are
prepared, and a physical count of the
goods om had is not necessary because
it may take time to do the same.
GROSS PROFIT METHOD – is based on the
assumption that the rate of gross profit remains
approximately the same from period to period
and therefore the ratio of cost of goods sold to
net sales is relatively constant from period to
period.
Goods Available for sale (GAS) xx
Cost of goods sold (COGS) (xx)
Ending Inventory xx
Beginning Inventory xx
Purchases xx Gross profit rate on sales = Gross profit/net
Freight in xx sales
Total xx Gross profit rate on cost = Gross profit/cost of
Purchase return, allow and disc (xx) xx goods sold
Goods available for sale xx
Sales allowance and sales discount – are
ignored NOT DEDUCTED from sales. This is
COST OF GOODS SOLD:
because when the items decrease the amounts
a. Net sales x cost ratio (when based on of sales, they do not affect the physical volume
sales) of goods sold. They do not also increase the
b. Net sales/sales ratio (when gross profit inventory of goods unlike in SALES RETURN
is based on cost where there is an actual addition to goods at
- Gross profit mo dati ang gagamitin mo hand.
para makuha ang COGS para masolve - Deducting these two would overstate
ang EI the inventory and understate the cost
- KUNG SINO ANG “BASED” sya ang 100% of goods sold and overstate gross
income.
Beginning Inventory xx
Net Purchases xx
Goods available for sale xx
Retail method:
Cost of goods sold xx
- This method is often used in the retail
Net sales x or / ratio xx xx
industry for measuring inventory of
Ending Inventory xx
large number
- Retail means selling price.
Net sales xx The use of the retail inventory method requires
Cost of goods sold xx that records be kept which must show the
Gros profit xx following data:
a. Beginning inventory at cost and at retail
price
Net Sales = Sales – Sales Return/ Sales Return &
b. Purchase during the period at cost and
allowances)
at retail price
c. Adjustments to the original retail price
TGAS xx
such as additional markup, markup
COGS (xx)
cancelation, markdown and markdown
EI estimated xx
cancelation.
Less:
d. Other adjustments such as
Salvage value xx
departmental transfer, breakage,
Consignment out xx
shrinkage, theft, damaged goods, and
Goods in transit xx
employee discount.
Other not in the
Warehouse xx (xx)
Goods available for sale at retail or SP xx
Fires loss xx
Net sales (Gross – sales return) xx
Ending inventory at SP xx
Multiply by ratio xx
Ending inventory cost xx j. Normal shortage, shrinkage spoilage
breakage – deducted from goods
Cost ratio = Goods available for sale at available for sale AT RETAIL.
cost/goods available for sale at SP k. Abnormal shortage, shrinkage, spoilage,
breakage – deducted from goods
available for sale for both cost and
Illustration:
retail.

Other items related to retail method:

a. Initial Markup – original markup on the

cost of goods.
b. Original retail – the sale price at which
the goods are first offered for sale.
c. Additional markup – increase in sales
price above the original sales price.
d. Markup cancelation – decrease in sales
price that does not decrease the sales
price below the original price.
e. Net additional markup or net markup:
Mark up – markup cancelation

Treatment of items: f. Markdown – decrease in sales price

a. Purchase discounts – deducted from below the original sales price
purchases at cost only g. Markdown cancelation – increase in
b. Purchase return – deducted from sales price that does not increase the
purchases at cost and at retail sales price above the original sales
c. Purchase allowance – deducted from price.
purchases at cost only h. Net markdown:
d. Freight in – addition to purchases at Markdown – Markdown cancelation
cost only
e. Department transfer in or debit - i. Maintained markup:
additional to purchase at cost and at Cost – sales price after adjustment for
retail. all of the items above
f. Departmental transfer out or credit – This is also known is markon.
deduction from purchases at cost and
at retail. SUMMARY
g. Sales discount and sales allowance – COST RETAIL
disregarded, meaning not deducted BI xx xx
from sales. Purchases xx xx
h. Sales return – deducted from sales. Purchase return (xx) (xx)
Also, if the account is sales returns and Purchase allowance (xx)
allowances Purchase discount (xx)
i. Employee discounts – added to sales.
Freight in xx
Departmental transfer
In/debit xx xx
Departmental transfer
out/credit (xx) (xx)
Abnormal losses (xx) (xx)
Markup xx
Markup cancellation (xx)
Markdown (xx)
Markdown cancellation xx
TGAS xx xx

- Conservative approach includes net

markup and excludes net markdown in
determining the cost ratio. It is also
lower than the average cost thus, this is
known as the lower of average cost or
market.
- The average cost approach includes
both net markup and net markdown in
determining cost ratio.

FIFO retail approach – considers also both net

markup and net markdown in computing the
cost ratio. However, a current cost ratio is
determined every year considering the net
purchases during the year and excluding the
beginning inventory.

METHODS IN COMPUTING COST RATIO:

BI MU MD
FIFO X
AVERAGE
CONSERV. X

- If FIFO, beginning inventory is not

included in the formula
- If average, kasali LAHAT
- If conservative, LAHAT NG MARKDOWN
hindi kasama

COST RATIO = TGAS @cost/TGAS @retail