INVENTORY

– 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/ in rendering of services.

INITIAL MEASUREMENT:
- shall comprise all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their proper
location and condition.

SUBSEQUENT MEASUREMENT:
-Lower of cost or Net Realizable Value (Est. SP – est. cost to complete – est. cost to sell)

ITEMS TO BE INCLUDED IN INVENTORY WHOSE INVETORY IS IT?

1. Goods in transit from supplier
a. FOB Shipping Point Buyer
b. FOB destination Seller
2. Consigned goods Consignor (seller)
3. Sales out on approval Seller
4. Sales with buyback agreement Seller
5. Sales with high rates of returns Buyer, if it can estimate return
6. Sales on installment Buyer, if it can estimate collectability
7. Segregated goods in the warehouse
a. Special order goods Buyer, upon completion
b. Hold for shipping instructions Seller

INVENTORY VALUATION:
1. FIFO
2. Average
a. Weighted Average
b. Moving Average

INVENTORY ESTIMATION: (RETAIL METHOD)

COST RETAIL
Beginning Inventory XX XX
Purchases XX XX
Less: Purchase Returns (XX) (XX)
Purchase Discount (XX)
Freight In XX
Department Transafer In XX XX
Department Transfer Out (XX) (XX)
TGAS @ Cost XX

Net Mark-up XX
Net Mark-down (XX)
TGAS @ Retail XX
Less: Net Sales
Sales XX
Sales Returns (XX)
Employee disc XX
Loss due to
shrinkage XX (XX)
ENDING INVENTORY @ RETAIL XX

ENDING INVENTORY @ COST (Cost ratio x End. Inventory @ Retail)

a. FIFO Net Purchases @ Cost X End. Inventory @ Retail
Net Purchases + Net Mark-up – Net Mark-down
b. LIFO Beginning Inventory @ cost X End. Inventory @ Retail
Beginning Inventory @ retail
c. CONSERVATIVE TGAS @ Cost X End. Inventory @ Retail
TGAS @ Retail – Net Mark-down
d. AVERAGE TGAS @ Cost X End. Inventory @ Retail
TGAS @ Retail

CHANGE IN INVENTORY METHOD (COUNTER BALANCING)

Ending Inventory, Prior Year using FIFO (Year prior to date of change) XX
Ending Inventory, Prior Year using Weighted (Year prior to date of change) (XX)
Overstatement/Understatement of Ending Inventory XX/(XX)

*If Ending Inventory last year is Overstated = Net income & Retained Earnings last year is Overstated
Retained Earnings XX
Merchandise Inventory Beg. XX
*If Ending Inventory last year is Understated = Net income & Retained Earnings last year is Understated
Merchandise Inventory Beg. XX
Retained Earnings XX
INVENTORY ERROR
ENDING INVENTORY IS:
a. OVERSTATED Year 1: COS is Understated, Net Income & Retained Earnings is Overstated
Year 2: Beginning Inv. is Overstated, COS is Overstated, Net Income is Understated &
Retained Earnings is Correct
b. UNDERSTATED Year 1: COS is Overstated, Net Income & Retained Earnings is Understated
Year 2: Beginning Inv. is Understated, COS is Understated, Net Income is Overstated &
Retained Earnings is Correct