INVENTORIES
 Assets that are held for sale in the ordinary
course of business (Merchandising/Trading)
 in the process of production for such sale
(Manufacturing)
 or in the form of materials or supplies to be
consumed in the production process
(Manufacturing)
 or in rendering services (Service)
Measurement:
Initially – at cost
Subsequently – LCNRV
Trading Business Inventories
 Merchandise Inventory
 Purchases
 Relevant or directly related cost
Manufacturing Business Inventories
 Finished Goods
 Goods/Work in process
 Raw Materials
 Factory Overhead (Factory or
Manufacturing Supplies, and other
Indirect Materials)
Service Business Inventories
 Labor and other costs of personnel
directly engaged in providing the service
Goods includible in the inventory
*inventories are included in the entity’s
Inventory account balance regardless of the
location. What matters is if the entity has the
legal title over those inventories
1. Goods owned and on hand
2. Goods out on consignment to consignee
3. Goods in transit and purchased FOB
Shipping Point
4. Goods in transit and sold FOB Destination
5. Testers, goods in the hands of salesmen or
agents
6. Goods held by the customer on approval or
on trial
Other specific items includible in the inventory
1. Items counted in the bodega
2. Items in receiving department, returned by
customer, in good condition
3. Items ordered and in the receiving
department, invoice not received (or even
received)
4. Items in the shipping department
5. Items shipped today, invoice mailed, FOB
destination
6. Items being used for window display
7. Items on counter for sale
8. Materials, Goods in Process, Finished Goods
9. Materials in Transit FOB Shipping Point
10. Finished Goods in transit to customers. FOB
Destination
11. Supplies, expenses, costs, and charges
directly related to inventories
12. Goods in Process/Finished goods at cost of
materials, direct labor and including
overhead. (if nawawala yung overhead,
hanapin din yun at isama)
*items shipped today = tayo nagbenta. So to
include in inventory amount, FOB Destination
dapat.
*Items ordered = tayo bumili. So to include in  Two approaches: Gross Profit Method and
inventory amount, FOB Shipping Point Dapat Retail Inventory Method
*Materials in Transit, tayo bumili. Finished Gross Profit Method
Goods in Transit, tayo ang nagbebenta Assuming that gross profit is 40%....
*Consigner, nagpapabenta. Consignee yung Formula: Based on Based on
inutusan para magbenta Sales Cost
Net Sales 100% 140%
Cost of Goods 60% 100%
Goods excluded/ignored in the inventory Sold
*deduct the following items below if these are Gross Profit 40% 40%
(already) included in the amount of inventory *kung saan nakabase, siya yung 100%

*If the cost includes the gross profit, the

operation for based on sales will be cost
1. Items specifically segregated per sales including profit x rate of cost. For based on
contract cost, cost including profit / rate of net sales
2. Items that are damaged, defective, and/or
unsalable
3. Goods held out of consignment Eg: 400,000 including a 40% Profit based on
4. Goods in transit and purchased, FOB sales vs 750,000 including 50% profit on based
Destination on cost. Compute for the cost of the two
5. Goods in transit and sold, FOB Shipping approaches
Point
6. Office supplies and other office assets.
7. Unexpired insurance on inventories Based on Sales
Formula:
8. Advances for materials ordered (if not yet
delivered, and no legal entitlement Net Sales 100% 500,000
attached) Cost of Goods 60% 240,000
9. Estimated profit on cost Sold (400k x
10. Estimated profit on sales 60%)
11. Items at selling price (use the cost instead) Gross Profit 40% 160,000

Formula: Based on Cost

Inventory Estimation
 Done when inventory is destroyed by fire Net Sales 150% 750,000
and other catastrophe, or theft Cost of Goods 100% 500,000
Sold (750k /
 Physical count of goods on hand and is
150%)
necessary to prove the correctness or
Gross Profit 50% 250,000
reasonableness of such count by making an
estimate
 Interim financial statements are prepared
and physical count of goods on hand is not
necessary
COST OF INVENTORIES
1. Cost of Purchase
a. + Purchase Price (Price magkano
binili)
b. + Import Duties (Additional cost for
imported products)
c. + Irrecoverable Taxes (Taxes na
component talaga ng inventory)
i. VAT in general is
recoverable and not
capitalized unless the entity
is non-vat registered
d. + Freight Cost (Transportation Cost)
e. + Handling Cost (Cost of transferring
items from one location to another)
f. + Other directly attributable cost
g. – Trade Discounts (Tawad)
h. – Rebates (Mga tawad na
natanggap after reaching a certain
criteria)
2. Cost of Conversion
a. + Direct Labor
b. + Overhead (Fixed and Variable)
i. Factory Expenses
ii. Indirect Materials
iii. Indirect Labor
3. Other Cost incurred in bringing inventories
to their present location and condition
a. Cost incurred due to customer’s
specification
b. Storage cost necessary in the
production process prior to a
further production stage (for raw
materials and work in process)
4. Other Cost that should be excluded
a. Abnormal wastages (capitalized if
normal losses)
b. Storage cost for finished goods
(capitalized if related to RM and
WIP)
c. Administrative expenses
(capitalized if traceable)
d. Distribution/Selling expenses
e. Foreign Exchange Rate Differences
f. Interest Expense over the financing
period
g. Salaries of other departments not
related to production/factory
h. Sales/brokerage commission
i. After-sales costs
Measurement: Lower of Cost and Net
Realizable Value (LCNRV) on item by item basis
Net Realizable Value
 Is the estimated selling price in the ordinary
course of business less estimated
completion and estimated cost of disposal
NRV = Selling Price – Cost to Complete – Cost to sell
or
NRV = Inventory – Allowance for writedown
(balance sheet basis)
Cost to Sell
 Magkano magagastos para mabenta
Cost to Complete
 Applicable if there are goods in process
 Magkano magagastos para matapos
Selling price < Cost if inventories…
1. are damaged
2. become wholly or partially obsolete
3. selling prices declined
4. estimated cost to complete or disposal has
increased
Cost > NRV = with inventory writedown
Cost < NRV = no inventory writedown
Accounting methods for Inventory write down
Direct Method (COGS Method)
Inventory, end xxx
Income Summary xxx
Inventory, beg
Net Purchases
Total Goods Available for Sale
Inventory, end
COGS
Allowance Method
Loss on inv. writedown
Allow. on reversal of writedown
Alow on inv. writedown xxx
Gain. on inv. writedown
To record increase in NRV
Inventory, beg
Net Purchases
Total Goods Available for Sale
Inventory, end
COGS before writedown
Loss on inventory writedown
Gain on inventory writedown
COGS after writedown
Different Approaches for LCNRV
1. Individual Inventory Item/ Item by item
basis
 Most conservative
 Steps:
1. Compare and find the
LCNRV per item
2. Total all the LCNRV
2. Inventory Category
 Steps:
1. Total the cost and NRV
separately for each
category
2. Compare the total cost and
NRV of each category and
pick whichever is lower
3. Total all LCNRV of each
department
3. Inventory as a whole
XXX  Steps:
XXX 1. Total all the cost and NRV
XXX separately for all categories
(XXX) 2. Compare the total cost and
XXX NRV of all categories and
pick whichever is lower
Goods in Transit
xxx  FOB – Free on Board
xxx
 FOB Shipping Point – ownership is
transferred upon shipment of the goods.
During transit, it is owned by the buyer.
xxx
 FOB Destination – ownership is transferred
upon the receipt of goods by the buyer.
XXX During transit, it is owned by the seller
XXX  Freight Prepaid – paid by the seller
XXX
(XXX)  Freight Collect – paid by the buyer
XXX  Free Along Side (FAS) – goods are alongside
XXX the carrier. Malapit sa pantalan yung seller.
(XXX) Sagot na ni seller yung papunta ng pantalan
XXX pero once maturnover na sa carrier, pag-
aari na ng buyer yun kaya siya dapat
magbayad ng freight.
 Cost, Insurance, Freight (CIF) – buyer
assumes CIF
 Ex-ship – seller transfers the title after the
goods are unloaded. Record freight out as
seller
Inventory Cost Flow
- FIFO (Periodic/Perpetual)
- Weighted Average (Periodic)
= TGAS / Units available for sale
- Moving Average (Perpetual)
- LIFO (Not allowed anymore)
Purchase Commitments
Are obligations of the entity (as the buyer) to
acquire certain goods some time in the future at
a fixed price and fixed quantity. Applicable if
non-cancellable yung commitment
Illustration 1:

ABC entered into commitment to purchased

100,000 barrels of aviation fuel from XYZ
Relative Sales Price Method Company
This method is used to apportion the cost of
commodities purchased at a lump sum (basket) Nov. 15 – Contract Date 500,000
using respective sales price Dec. 31 – End of the period 500,000
Jan. 15 – Purchase Date 500,000
Illustration:

Land and Building are purchased at a basket Journal Entry:

price of P5,000,000. Assume that the said
properties have a selling price of 2,000,000 and At Nov. 15
1,500,000 respectively No entry

Sales Price Pro- Allocated Dec. 31

rate Cost
Land 2,500,000 25/40 3,125,000 No entry
Building 1,500,000 15/40 1,875,000
Total 4,000,000 5,000,000
Jan. 15
*If all lump cost are assets/liabilities/equity, Purchases 500k
allocate at fair value or any bases Accounts Payable 500k
*If the lump cost are mixture of liability and
equity, allocate liabilities at fair value if possible Illustration 2:
and the residual to equity
ABC entered into commitment to purchased
100,000 barrels of aviation fuel from XYZ
Company

Nov. 15 – Contract Date 500,000

Dec. 31 – End of the period 450,000
Jan. 15 – Purchase Date 420,000

Journal Entry:

At Nov. 15

No entry
 Illustration 4:

Dec. 31 ABC entered into commitment to purchased

100,000 barrels of aviation fuel from XYZ
Loss on Purchase Commitment 50k
Company
Estimated Liab. From Pur. Com. 50k
Nov. 15 – Contract Date 500,000
Dec. 31 – End of the period 450,000
Jan. 15
Jan. 15 – Purchase Date 510,000
Purchases 420k
Estimated Liab. From Pur. Com 50k
Journal Entry:
Loss on Purchase Commitment 30k
Accounts Payable 500k At Nov. 15

No entry
*record what is lower of cost and nrv for purchases

Dec. 31
Illustration 3:
Loss on Purchase Commitment 50k
ABC entered into commitment to purchased Estimated Liab. From Pur. Com. 50k
100,000 barrels of aviation fuel from XYZ
Company
Jan. 15
Nov. 15 – Contract Date 500,000
Dec. 31 – End of the period 450,000 Purchases 500k
Jan. 15 – Purchase Date 480,000 Estimated Liab. From Pur. Com 50k
Gain on Pur. Com. 50k
Accounts Payable 500k
Journal Entry:

At Nov. 15 *record what is lower of cost and nrv for purchases

No entry *pwede kang magrecord ng gain hanggang sa kung

magkano ka lang nagrecord ng loss

Dec. 31
Illustration 5:
Loss on Purchase Commitment 50k
Estimated Liab. From Pur. Com. 50k ABC entered into commitment to purchased
100,000 barrels of aviation fuel from XYZ
Company
Jan. 15
Nov. 15 – Contract Date 500,000
Purchases 480k
Dec. 31 – End of the period 600,000
Estimated Liab. From Pur. Com 50k
Jan. 15 – Purchase Date 510,000
Gain on Pur. Com. 30k
Accounts Payable 500k
Journal Entry:
*record what is lower of cost and nrv for purchases At Nov. 15
No entry

 Interim financial statements are prepared

Dec. 31 and physical count of goods on hand is not
necessary
No entry
 For estimations, accounts that will matter
are the ones with inventory
flow/movement
Jan. 15  Net Sales = Sales – Sales Returns/
Purchases 500k Sales Returns and Allowances
Accounts Payable 500k  TGAS
- COGS
Ending Inv., Estimated
*record what is lower of cost and nrv for purchases
Ending.Inv., Actual
*pwede kang magrecord ng gain hanggang sa kung
magkano ka lang nagrecord ng loss
Retail Inventory Method
Retail = selling price
Inventory Estimation
 Done when inventory is destroyed by fire TGAS @ retail XXX
Net Sales (XXX)
and other catastrophe, or theft
Ending Inventory @ retail XXX
TGAS XXX Cost Ratio X%
COGS (XXX) Ending Inventory @ cost XXX
Ending Inventory, est. XXX
Less: Salvage Value (XXX)
FIFO Markups and Markdown
Consignment out (XXX)
Goods in Transit (XXX) Average Beg Inv., Markups and Markdown
Others (XXX)
Catastrophe Loss XXX Conservative Beg. Inv. And Markups

 Physical count of goods on hand and is

necessary to prove the correctness or Cost Ratio TGAS @ cost
reasonableness of such count by making an TGAS @ retail
estimate

TGAS XXX
COGS (XXX)
Ending Inventory, est. XXX
Ending Inventory, act. (XXX)
Overage/Shortage/Variance XXX
Treatment of Items Cost Retail
Beginning Inventory X X
Purchases X X
Freight In X
Purchase Returns (X) (X)
Purchase Discount (X)
Purchase Allowance (X)
Departmental Transfer In X X
Departmental Transfer Out (X) (X)
Abnormal Shortage, Shrinkage, Spoilage and Breakage (X) (X)
Markup X
Markup Cancelation (X)
TGAS – Conservative XX XX
Markdown (X)
Markdown cancelation X
TGAS – Average XX XX
FIFO XX
Sales (X)
Sales Return X
Sales Discounts -
Sales Allowance -
Employee Discounts (X)
Normal Shortage, Shrinkage, Spoilage and Breakage (X)
Ending Inventory XX