LM INTERM ACTG 1 4of8 1SAYE2024

MODULE 4 Module Title: Inventories
PROGRAM: BSMA Year Level: II Section ________
COURSE CODE: ACCT09 COURSE DESCRIPTION: Intermediate

Accounting Part 1
LEARNING OUTCOMES
At the end of this module, the students should be able to:
(1) define inventory and identify the timing of its recognition.
(2) differentiate between the periodic and the perpetual inventory

systems.
(3) measure inventories and apply the cost formulas.
(4) account for inventory write-down and the reversal thereof.
Prepared Reviewed and Checked
AFRO L. REYES, CPA, MBA

Instructor Program Head
Recommending Approval Approved
WILMA WENG P. CASALME, PhD

Vice President for Academic Affairs College Administrator
TANAUAN CITY COLLEGE COURSE CODE: ACCT09/MODULE NUMBER 4 COURSE NAME: INTERMEDIATE
ACCOUNTING PART 1
LEARNING MODULE
Program: BSMA Topic: Inventories

Course: Intermediate Accounting Part 1 Instructor: Afro L. Reyes, CPA, MBA
Code ACCT09 Module #: 4 of 8 Weeks #: 7 and 8 #of Pages: 22
I. Preliminaries
Introduction to
This module tackles the inventory and identify the timing of its recognition. The periodic and
the Module
the perpetual inventory systems are differentiated. Inventories are measured.
Objective
This module is intended for the seventh and eighth weeks, out of 18 weeks of meetings in
the semester.
The content of this module was contributed by the students enrolled in the course, taken from
the textbook and reviewer, under the direction and review of the instructor.
Assessment/
Section Topics Learning Outcomes Evaluation Modality
At the end of this module, the The performance Visual and auditory
1. Classes of Inventories students should be able to: indicators will be modalities will be
2. Goods Includible in the the scores adopted thru in-person
Inventory achieved by the meeting and on-line
(1) define inventory and identify
3. Freight Terms students in the messaging.
the timing of its recognition.
4. Consigned Goods written works
5. Periodic System and and performance
(2) differentiate between the
Perpetual System tasks. These are
periodic and the perpetual inventory
6. Trade Discounts and detailed further in
systems.
Cash Discounts section IV of this
7. Gross and Net Methods module, below.
of Recording Purchases (3) measure inventories and
8. First In, First Out apply the cost formulas.
9. Weighted Average –
Periodic (4) account for inventory write-
10. Weighted Average – down and the reversal thereof.
Perpetual
II. Instructions
KEYWORDS AND CONCEPTS
Content Lecture/ Discussion
BSMA 2A, First Semester, AY 2022 - 23
(Reported by Joyce Anne Lachica Manato, Textbook pp 477 – 480; proofread by the
Instructor using the 2022 edition.)
INVENTORIES
ACCOUNTING PART 1
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 are broadly classified into two, namely inventories of a trading concern and
inventories of manufacturing concern.
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.
A manufacturing concern is one that buys goods which are altered or converted into
another form before they are made available for sale.
The inventories of a manufacturing concern are finished goods, goods in process, raw
materials and factory or manufacturing supplies.
Statement presentation
Inventories are generally classified as current assets.
The inventories shall be presented as one line item in the statement of financial position
but the details of the inventories shall be disclosed in the notes to financial statements.
For example, the note shall disclose the composition of the inventories of a manufacturing
concern as finished goods, goods in process, raw materials and manufacturing supplies.
Definitions
Finished goods are completed products which are ready for sale.
Finished goods have been assigned their full share of manufacturing costs.
Goods in process or work in process are partially completed products which require
further process or work before they can be sold.
Raw materials are goods that are to be used in the production process.
No work or process has been done on them as yet by the entity inventorying them.
Broadly, raw materials cover all materials used in the manufacturing operations.
However, frequently raw materials are restricted to materials that will be physically
incorporated in the production of other goods and which can be traced directly to the end
product of the production process.
Factory or manufacturing supplies are similar to raw materials but their relationship to the
end product is indirect.
Factory or manufacturing supplies may be referred to as indirect materials.
It is indirect because they are not physically incorporated in the products being
manufactured.
There are other manufacturing supplies like paint and nails which become part of the
finished product.
ACCOUNTING PART 1
However, since the amounts involved are insignificant it is impractical to attempt to
allocate their costs directly to the product.
These supplies find their way into the product cost as part of the manufacturing overhead.
Goods includible in the inventory

The general rule is that all goods to which the entity has title shall be included in the
inventory, regardless of location.
The phrase “passing of title” is a legal language which means the point of time at which
ownership changes.
Legal test
Is the entity the owner of the goods to be inventoried?
If the answer is in the affirmative, the goods shall be included in the inventory.
If the answer is in the negative, the goods shall be excluded from the inventory.
Applying the legal test, goods owned and on hand, goods out on consignment to
consignee, goods in the hands of salesmen or agents and goods held by customers on
approval or trial are included in inventory.
Consigned goods
A consignment is a method of marketing goods in which the owner called the consignor
transfers physical possession of certain goods to an agent called the consignee who sells
them on the owner’s behalf.
Consigned goods shall be included in the consignor’s inventory and excluded from the
consignee’s inventory.
Freight and other handling charges on goods out on consignment are part of the cost of
goods consigned.
Exception to the legal test
Installment contracts may provide for retention of title by the seller until the selling price
is fully collected.
Following the legal test, the goods sold on installment basis are still the property of the
seller and therefore normally includible in his inventory.
However, in such a case, it is an accepted accounting procedure to record the installment

sale as a regular sale on the part of the seller and as a regular purchase on the part of
the buyer.
Thus, the goods sold on installment are included in the inventory of the buyer and
excluded from that of the seller, the legal test to the contrary notwithstanding.
This is a clear example of economic substance prevailing over legal form.
Who is the owner of goods in transit?
The ownership of goods in transit depends on the terms, whether FOB destination or FOB
shipping point. FOB means free on board.
Under FOB destination or FOB buyer, ownership of goods purchased is transferred only
upon receipt of the goods by the buyer at the point of destination.
ACCOUNTING PART 1
Thus, under FOB destination, the goods in transit are still the property of the seller.
Accordingly, the seller shall legally be responsible for freight charges and other expenses
up to the point of destination.
Under FOB shipping point or FOB seller, ownership is transferred upon shipment of the
goods and therefore, the goods in transit are the property of the buyer.
Accordingly, the buyer shall legally be responsible for freight charges and other expenses
from the point of shipment to the point of destination.
In practice, during an accounting period, the accountant normally records purchases

when goods are received and sales when goods are shipped, regardless of the precise
moment at which title passed.
This procedure is expedient and no material misstatements occur in the financial

statements because title usually passes in the same accounting period.
However, the accountant should carefully analyze the invoice terms of goods that are in
transit at the end of the accounting period to determine who has legal title.
Accordingly, adjustments are in order if errors are committed in recording purchases and
sales.
(Reported by Carlo H. Manito, Textbook pp 481- 484; proofread by the Instructor using
the 2022 edition.)
Freight terms
Freight collect means that the freight charge on the goods shipped is not yet paid. The
common carrier shall collect the same from the buyer. Thus, the freight charge is actually
paid by the buyer if the term is freight collect.
Freight prepaid means that the freight charge on the goods shipped is already paid by
the seller.
The terms “FOB destination” and “FOB shipping point” determine ownership of the goods
in transit and the party who is supposed to pay the freight charge and other expenses
from the point of shipment to the point of destination.
The terms “freight collect” and “freight prepaid” determine the party who actually paid the
freight charge but not the party who is supposed to legally pay the freight charge.
Maritime shipping terms
FAS or free alongside – A seller who ships FAS must bear all 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.
CIF or Cost, insurance and freight - Under this shipping contract, the buyer agrees to
pay in a lump sum the cost of the goods, insurance cost and freight charge.
The shipping contract may be modified as CF which means that the buyer agrees to pay
in a lump sum the cost of the goods and freight charge only.
In either case, 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.
ACCOUNTING PART 1
Ex-ship – A seller who delivers the goods ex-ship bears all expenses and risk of loss
until the goods are unloaded at which time title and risk of loss shall pass to the buyer.
Accounting for inventory
Two systems are offered in accounting for inventory, namely periodic system and
perpetual system.
The periodic system calls for the physical counting of goods on hand at the end of the
accounting period to determine quantities.
The quantities are then multiplied by the corresponding unit costs to get the ending
inventory value. This approach gives actual or physical inventory.
Under the periodic system, the cost of goods sold is computed only at the end of reporting
period by deducting the physical inventory from the cost of goods available for sale.
The periodic inventory procedure is generally used when the individual inventory items
have small peso investment, such as groceries, hardware and auto parts.
The perpetual system requires the maintenance of records called stock cards that usually
offer a running summary of the inventory inflow and outflow.
Inventory increases and decreases are reflected in the stock cards and the resulting
balance represents the inventory. This approach gives book or perpetual inventory.
The perpetual inventory procedure is commonly used where the inventory items treated
individually represent a relatively large peso investment such as jewelry and cars.
In an ideal perpetual system, the stock cards are kept to reflect and control both units
and costs.
Consequently, the entity would be able to know the inventory on hand at a particular
moment in time.
In recent years, the widespread use of computers has enabled practically all large trading
and manufacturing entities to maintain a perpetual inventory system.
With computers, the entities can conveniently and effectively store and retrieve large
amount of inventory data.
When the perpetual system is used, a physical count of the units on hand should at least
be made once a year to confirm the balances appearing on the stock cards.
Illustration – Periodic system
1. Purchase of merchandise on account, ₱300,000.
Purchases 300,000
Accounts payable 300,000
2. Payment of freight on the purchase, ₱20,000.
Freight in 20,000
Cash 20,000
3. Return of merchandise purchased to supplier, ₱30,000.

Purchase return 30,000
4. Sale of merchandise on account, ₱400,000 at 40% gross profit.

ACCOUNTING PART 1
Accounts receivable 400,000
Sales 400,000
5. Return of merchandise sold to customer, ₱25,000.
Sales return 25,000

6. Adjustment of ending inventory, ₱65,000.
Merchandise inventory-end 65,000

Income summary 65,000
(Reported by Johari G. Mipanga, BSMA 2B, First Semester, AY 2022 – 23, Textbook pp
485 – 488; proofread by the Instructor using the 2022 edition.)
Illustration - Perpetual system
1. Purchase of merchandise on account, ₱300,000.
Merchandise inventory 300,000

2. Payment of freight on the purchase, ₱20,000.

Cash 20,000
3. Return of merchandise purchased to supplier, ₱30,000.

4. Sale of merchandise on account, ₱ 400,000 at gross profit of 40%.The cost of

merchandise sold is 60% or ₱ 240,000.

Sales 400,000
Cost of goods sold 240,000

Under the perpetual system, the cost of merchandise sold is immediately recorded
because this is clearly determinable from the stock card.
5. Return of merchandise sold from customer, ₱25,000.The cost of the merchandise

returned is 60% or ₱15,000.
Sales return 25,000


6. Adjustment of ending inventory.
The balance of the merchandise inventory account represents the ending inventory.
ACCOUNTING PART 1
As a rule, the ending merchandise inventory is not adjusted unless there is an inventory
shortage.
Inventory shortage or overage
In the illustration, the merchandise inventory account has a debit balance of ₱65,000.
If at the end of the accounting period, a physical count indicates a different amount, an
adjustment is necessary to recognize any inventory shortage or overage.
For example, if the physical count shows inventory on hand of ₱55,000, the following
adjustment is necessary:
Inventory shortage 10,000

Merchandise inventory (₱65,000 - ₱55,000) 10,000
The inventory shortage is usually closed to cost of goods sold because this is often the
result of normal shrinkage and breakage in inventory.
However, abnormal and material shortage shall be separately classified and presented
as other expense.
Trade discounts and cash discounts
Trade discounts are deductions from the list or catalog price in order to arrive at the
invoice price which is the amount actually charged to the buyer.
Thus, trade discounts are not recorded.
The purchase of trade discounts is to encourage trading or increase sales.
Trade discounts also suggest to the buyer the price at which the goods may be resold.
Cash discounts are deductions from the invoice price when payment is made within the
discount period. The purpose of cash discounts is to encourage prompt payment.
Cash discounts are recorded as purchase discount by the buyer and sales discount by
the seller.
Purchase discount is deducted from purchases to arrive at net purchases and sales
discount is deducted from sales to arrive at net sales revenue.
Illustration
The list price of a merchandise purchased is ₱500,000 less 20% and 10%, with credit
terms of 5/10, n/30.
This means that trade discounts are 20% and 10%, and the cash discount is 5% if
payment is made in 10 days.
The full amount of the invoice is paid if the payment is made after 10 days and within the
credit period of 30 days.
List price 500,000

First trade discount (20% x 500,000) (100,000)
400,000
Second trade discount (10% x 400,000) (40,000)
Invoice price 360,000
Cash discount (5% x 360,000) ( 18,000)
Payment within the discount period 342,000
Another approach
ACCOUNTING PART 1
Invoice price (500,000 x 80% x 90%) 360,000
Cash discount (18,000)
Payment within the discount period 342,000
The journal entry to record the purchase is:
Purchases 360,000
Note that the trade discounts are not recorded. The journal entry to record the payment
of the invoice within the discount period is:

Cash 342,000
Purchase discounts 18,000
The entry to record the payment beyond the discount period is:

Cash 360,000
Methods of recording purchases
1. Gross method - Purchases and accounts payable are recorded at gross amount of
invoice.
2. Net method - Purchases and accounts payable are recorded at net amount of the
invoice.
Illustration - Gross method
1. Purchases on account, ₱200,000, 2/10, n/30.
Purchases 200,000
2. Assume payment is made within the discount period.

Cash 196,000
Purchase discount (2% x 200,000) 4,000
3. Assume payment is made beyond the discount period.

Cash 200,000
Illustration - Net method
1. Purchases on account, ₱200,000, 2/10, n/30.
Purchases 196,000
2. Assume payment is made within the discount period.

Cash 196,000
3. Assume payment is made beyond the discount period.
ACCOUNTING PART 1
Purchase discount lost (other expense) 4,000
Cash 200,000
4. Assume it is the end of accounting period, no payment is made and the discount period
has expired.
Purchase discount lost 4,000

(Reported by Kaye Angelus Malabanan Claros, Textbook pp 489 – 492; proofread by the
Gross method vs. net method
The cost measured under the net method represents the cash equivalent price on the
date of payment and therefore the theoretically correct historical cost.
However, in practice, most entities record purchases at gross invoice amount.
Technically, the gross method violates the matching principle because discounts are
recorded only when taken or when cash is paid rather than when purchases that give rise
to the discounts are made.
Moreover, this procedure does not allocate discounts taken between goods sold and
goods on hand.
Despite its theoretical shortcomings, the gross method is supported on practical grounds.
The gross method is more convenient than the net method from a bookkeeping
standpoint.
Moreover, if applied consistently over time, the gross method usually produces no
material errors in the financial statements.
Cost of inventory
The cost of inventory shall comprise cost of purchase, cost of conversion and directly
attributable cost incurred in bringing the inventory to the present location and condition.
Cost of purchase
The cost of purchase comprises the purchase price, import duty, irrecoverable tax, freight,
handling and other cost directly attributable to the acquisition.
Trade discounts, rebates and other similar items are deducted in determining the cost of
purchase.
The cost of purchase shall not include foreign exchange differences which arise directly
from the acquisition of inventory involving a foreign currency.
Cost of conversion
The cost of conversion includes cost directly related to the units of production such as
direct labor.
The cost of conversion also includes a systematic allocation of fixed and variable
production overhead incurred in converting materials into finished goods.
ACCOUNTING PART 1
Fixed production overhead is the indirect cost of production that remains relatively
constant regardless of the volume of production.
Examples are depreciation and maintenance of factory building and equipment, and the
cost of factory management and administration.
Variable production overhead is the indirect cost of production that varies directly with
the volume of production.
Variable production overhead includes indirect labor and indirect materials.
Directly attributable cost
Directly attributable cost is the cost incurred in bringing the inventory to the present
location and condition.
For example, it may be appropriate to include the cost of designing product for specific
customers in the cost of inventory.
Abnormal amount of wasted material, storage cost, administrative overhead and

distribution or selling cost are recognized as expense when incurred.
However, storage cost related to goods in process or part-finished goods should be

included in cost of inventory.
Cost of inventory of a service provider
The cost of inventory of a service provider comprises primarily:
a. Labor and other cost of personnel directly engaged in providing the service,
including supervisory personnel
b. Directly attributable overhead
Labor and other cost relating to sales and general administrative personnel are
recognized as expenses when incurred.
(Reported by Maylyn Ubaldo Pelobello, Reviewer pp 317 – 320; proofread by the

Instructor.)
INVENTORY
Basic problems
Problem 26-1 (IAA)
Aman Company provided the following data:
Items counted in the bodega 4,000,000

Items included in the count specifically segregated
per sale contract 100,000
Items in receiving department, returned by customer,
in good condition 50,000
Items ordered and in the receiving department 400,000
Items ordered, invoice received but goods not
received. Freight is on account of seller. 300,000
Items shipped today, invoice mailed, FOB shipping point 250,000
Items shipped today, invoice mailed, FOB destination 150,000
Items currently being used for window display 200,000
Items on counter for sale 800,000
Items in receiving department, refused because of damage 180,000
Items included in count, damaged and unsalable 50,000
Items in the shipping department 250,000
ACCOUNTING PART 1
What is the correct amount of inventory?
a. 5,700,000
b. 6,000,000
c. 5,800,000
d. 5,150,000
Solution 26-1 Answer a
Items counted in the bodega 4,000,000

Items included in count specifically segregated (100,000)
Items returned by customer 50,000
Items ordered and in receiving department 400,000
Items shipped today, FOB destination 150,000
Items for display 200,000
Items on counter for sale 800,000
Damaged and unsalable items included in count (50,000)
Items in the shipping department 250,000
5,700,000
Problem 26-2 (IAA)
Lunar Company included the following items in inventory:
Materials 1,400,000
Advance for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventory 60,000
Advertising catalogs and shipping cartons 150,000
Finished goods in factory 2,000,000
Finished goods in entity-owned retail store,
including 50% profit on cost 750,000
Finished goods in hands of consignees including
40% profit on sales 400,000
Finished goods in transit to customers,
shipped FOB destination at cost 250,000
Finished goods out on approval, at cost 100,000
Unsalable finished goods, at cost 50,000
Office supplies 40,000
Materials in transit, shipped FOB shipping point,
excluding freight of ₱30,000 330,000
Goods held on consignment, at sales price, cost
₱150,000 200,000

a. 5,375,000
b. 5,500,000
c. 5,540,000
d. 5,250,000
Solution 26-2 Answer b
Materials 1,400,000
Finished goods in factory 2, 000,000
Finished goods in entity-owned retail store (750,000/150%) 500,000
Finished goods in the hands of consignees (400,000 x 60%) 240,000
Finished goods in transit 250,000
Finished goods out on approval 100,000
Materials in transit (330,000 + 30,000) 360,000
Correct inventory 5,500,000
ACCOUNTING PART 1
Problem 26-3 (IAA)
Ram Company provided the following information at the end of current year.
Finished goods in storeroom, at cost, including

overhead of ₱400,000 or 20% 2,000,000
Finished goods in transit, including freight charge of
₱20,000, FOB shipping point 250,000
Finished goods held by salesmen, at selling price,
cost, ₱100,000 140,000
Goods in process, at cost of materials and direct labor 720,000
Materials 1,000,000
Materials in transit, FOB destination 50,000
Defective materials returned to suppliers 100,000
Shipping supplies 20,000
Gasoline and oil for testing finished goods 110,000
Machine lubricants 60,000

a. 4,000,000
b. 4,170,000
c. 4,270,000
d. 4,090,000
Solutions 26-3 Answer b
Finished goods 2,000,000

Finished goods held by salesmen at cost 100,000
Materials 1,000,000
Factory supplies:
Gasoline and oil for testing finished goods 110,000
Machine lubricants 60,000
Correct inventory 4,170,000
Goods in process, including overhead 100%

Overhead 20%
Goods in process, excluding overhead 80%
Total cost of goods in process (720,000/80%) 900,000
Problem 26-4 (IFRS)
Brilliant Company has incurred the following costs during the current year:
Cost of purchase based on vendors’ invoices 5,000,000

Trade discounts on purchases already deducted
from vendors’ invoices 500,000
Import duties 400,000
Freight and insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Salaries of accounting department 600,000
Brokerage commission paid to agents for
arranging imports 200,000
Sales commission paid to sales agents 300,000
After-sales warranty costs 250,000
What is the total cost of purchases?

a. 5,700,000
b. 6,100,000
c. 6,700,000
ACCOUNTING PART 1
d. 6,500,000
Solutions 26-4 Answer c
Cost of purchases 5,000,000

Import duties 400,000
Freight and insurance 1,000,000
Other handling costs 100,000
Brokerage commission 200,000
Total cost of purchases 6,700,000
The salaries of accounting department, sales commissions and after-sales warranty costs
are not inventoriable but should be expensed immediately.
(Reported by Jens Ann Anillo Lamano, BSMA 2B, First Semester AY 2022 – 23, Textbook
pp 538 – 543; proofread by the Instructor using the 2022 edition.)
INVENTORY COST FLOW
Cost Formulas
PAS 2, paragraph 25, expressly provides that the cost of inventory shall be determined
by using either:
a. First in, First out

b. Weighted average
The standard does not permit anymore the use of the last in, first out (LIFO) as an
alternative formula in measuring cost of inventory.
First in, First out (FIFO)
The FIFO method assumes that the goods first purchased are first sold and consequently
the goods remaining in the inventory at the end of the period are those most recently
purchased or produced.
In other words, the FIFO is in accordance with the ordinary merchandising procedure that
the goods are sold in the other they are purchased.
The rule is “first come, first sold”.
The inventory is thus expressed in terms of recent or new prices while the cost of goods
sold is representative of earlier or old prices.
The FIFO method favors the statement of financial position in that the inventory is stated
at current replacement cost.
The objection to the FIFO method is that there is improper matching of cost against
revenue because the goods sold are stated at earlier or older prices resulting in
understatement of cost of goods sold.
Accordingly, in a period of inflation or rising prices, the FIFO method would result to the
highest net income.
However, in a period of deflation or declining prices, the FIFO method would result to the
lowest net income.
Illustration
ACCOUNTING PART 1
The following data pertain to an inventory item
Units Unit cost Total cost Sales

(in units)
Jan. 1 Beginning balance 800 200 160,000
8 Sale 500
18 Purchase 700 210 147,000

22 Sale 800
31 Purchase 500 220 110,000
The ending inventory is 700 units.
FIFO – Periodic
Units Unit cost Total cost
From Jan. 18 Purchase 200 210 42,000
From Jan. 31 Purchase 500 220 110,000
700 152,000
Cost of goods sold
Inventory – January 1 160,000

Purchases (147,000 + 110,000) 257,000
417,000
Goods available for sale (152,000)
FIFO – Perpetual
This requires the preparation of stock card.
Purchases Sales Balance

Date Units Unit Total cost Units Unit Total cost Units Unit Total cost
cost cost cost
Jan. 1 800 200 160,000
8 500 200 100,000 300 200 60,000

18 700 210 147,000 300 200 60,000
700 210 147,000
22 300 200 60,000
500 210 105,000 200 210 42,000
31 500 220 110,000 200 210 42,000
500 220 110,000
NOTA BENE
Note well that under FIFO-periodic and FIFO-perpetual, the inventory costs are the
same. In both cases, the January 31 inventory is ₱152,000.
Under FIFO perpetual, the cost of goods sold is determined from the stock card.
January 8 sale 100,000

22 sale (60,000 + 105,000) 165,000
Weighted average – Periodic
The cost of the beginning inventory plus the total cost of purchases during the period is
divided by the total units purchased plus those in the beginning inventory to get a
weighted average unit cost.
ACCOUNTING PART 1
Such weighted average unit cost is then multiplied by the units on hand to derive the
inventory value.
In other words, the average unit cost is computed by dividing the total cost of goods
available for sale by the total number of units available for sale for the period.
The preceding illustrative data are used.

Jan.1 Beginning balance 800 200 160,000
18 Purchase 700 210 147,000
31 Purchase 500 220 110,000
Total goods available for sale 2,000 417,000
Weighted average unit cost (417,000 / 2,000) 208.50

Inventory cost (700 x 208.50) 145,950
Cost of goods sold
Inventory – January 1 160,000

Purchases 257,000
Goods available for sale 417,000
Inventory – January 31 (145,000)
Weighted average – Perpetual
When used in conjunction with the perpetual system, the weighted average method is
popularly known as the moving average method.
PAS 2, paragraph 27, provides that the weighted average may be calculated on a periodic
basis or as each additional shipment is received depending upon the circumstances of
the entity.
Under this method, a new weighted average unit cost must be computed after every
purchase and purchase return.
Thus, the total cost of goods available after every purchase and purchase return is divided
by the total units available for sale at this time to get a new weighted average unit cost.
Such new weighted average unit cost is then multiplied by the units on hand to get the
inventory cost.
The moving average method requires the keeping of inventory stock card in order to
monitor the “moving” unit cost after every purchase.
January 1 Balance 800 200 160,000

8 Sale (500) 200 (100,000)
Balance 300 200 60,000
18 Purchase 700 210 147,000
Total 1,000 207 207,000
22 Sale ( 800) 207 (165,600)
Balance 200 207 41,400
31 Purchase 500 220 110,000
Total 700 216 151,400
Observe that a new weighted average unit cost is computed after every purchase.
ACCOUNTING PART 1
Thus, after the January 18 purchase, the total cost of ₱207,000 is divided by 1,000 units
to get a weighted average unit cost of ₱207.
After the January 31 purchase, the total cost of ₱151,400 is divided by 700 units to get a
new weighted average unit cost of ₱216.
Cost of goods sold from the stock card
January 8 Sale 100,000

22 Sale 165,600
The argument for the weighted average method is that it is relatively easy to apply,
especially with computers.
Moreover, the weighted average method produces inventory valuation that approximates
current value if there is a rapid turnover of inventory.
The argument against the weighted average method is that there may be a considerable
lag between the current cost and inventory valuation since the average unit cost involves
early purchases.
Last in, First out (LIFO)
The LIFO method assumes that the goods last purchased are first sold and consequently
the goods remaining in the inventory at the end of the period are those first purchased or
produced.
The inventory is thus expressed in terms of earlier or old prices and the cost of goods
sold is representative of recent or new prices.
The LIFO favors the income statement because there is matching of current cost against
current revenue, the cost of goods sold being expressed in terms of current or recent
cost.
The objection of the LIFO is that the inventory is stated at earlier or older prices and
therefore there may be a significant lag between inventory valuation and current
replacement cost.
Moreover, the use of LIFO permits income manipulation, such as by making year-end
purchases designed to preserve existing inventory layers.
At times these purchases may not even be in the best economic interest of the entity.
(Reported by Mary Keith Reign Villaruel Ferriol, Textbook pp 545 – 547; proofread by the
Another illustration

Jan. 1 Beginning balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
15 Sale ( 7,000)
16 Sale return 1,000
30 Purchase 16,000 150 2,400,000
31 Purchase return (5,000) 150 750,000
Ending balance 15,000
̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿
FIFO – whether periodic or perpetual
ACCOUNTING PART 1
Jan 10 Purchase 4,000 250 1,000,000
30 Purchase 11,000 150 1,650,000
15,000 2,650,000
̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿
The January 30 purchase of 16,000 units is reduced by the purchase return of 5,000 units
or net purchase of 11,000 units.
Note that under FIFO perpetual, the sale return of 1,000 units on January 16 would be
costed back to inventory at the latest purchase unit cost of ₱250 before the sale.
Moving average - Perpetual

Jan 1 Beginning balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
Balance 10,000 225 2,250,000
15 Sale (7,000) 225 (1,575,000)
Balance 3,000 225 675,000
16 Sale return 1,000 225 225,000
Balance 4,000 225 900,000
30 Purchase 16,000 150 2,400,000
Balance 20,000 165 3,300,000
31 Purchase return (5,000) 150 (750,000)
Balance 15,000 170 2,550,000
̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿ ̿̿̿̿̿̿̿̿̿ ̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿
Observe that the moving average unit cost changes every time there is a new purchase
or a purchase return. The moving average unit cost is not affected by a sale or a sale
return.
Weighted average - Periodic

Jan 1 Beginning balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
30 Purchase 16,000 150 2,400,000
31 Purchase return ( 5,000) 150 ( 750,000)
21,000 3,900,000
̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿ ̿̿̿̿̿̿̿̿̿ ̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿
Weighted average unit cost (₱3,900,000/21,000 units) 185.71
Cost of ending inventory (15,000 x 185.71) 2,785,650
Specific identification
Specific identification means that specific costs are attributed to identified items of
inventory.
The cost of the inventory is determined by simply multiplying the units on hand by their
actual unit cost.
This requires records which will clearly determine the actual costs of goods on hand.
PAS 2, paragraph 23, provides that this method is appropriate for inventories that are
segregated for a specific project and inventories that are not ordinarily interchangeable.
The specific identification 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.
ACCOUNTING PART 1
With specific identification, there is an actual determination of cost of units sold and on
hand.
The major argument against this method is that it is very costly to implement even with
high-speed computers.
Standard costs
Standard costs are predetermined product costs established on the basis of normal levels
of materials and supplies, labor, efficiency and capacity utilization.
Observe that a standard cost is predetermined and, once determined, is applied to all
inventory movements - inventory, goods available for sale, purchases and goods sold or
placed in production.
PAS 2, paragraph 21, states that the standard cost method may be used for convenience
if the results approximate cost.
However, the standards set should be realistically attainable and are reviewed and
revised regularly in the light of current conditions.
Standard costing is taken up in a higher accounting course and is not discussed further
in this book.
Relative sales price method
When different products are purchased at a lump sum, the single cost is apportioned
among the commodities based on their respective sales price.
The relative sales price approach is based on the philosophy that cost is proportionate to
selling price.
For example, products A, B, and C are purchased at “basket price” of ₱3,000,000.

Assume that the said products have the following sales price: A ₱500,000, B ₱1,500,000,
and C ₱3,000,000.
Computation of cost of each product
Product A 500,000 5/50 x 3,000,000 300,000

Product B 1,500,000 15/50 x 3,000,000 900,000
Product C 3,000,000 30/50 x 3,000,000 1,800,000
5,000,000 3,000,000
̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿ ̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿̿
(Reported by Mariel Simbajon Pacificador, BSMA 2B, First Semester AY 2022 – 23,
Reviewer pp 350 – 353; proofread by the Instructor.)
INVENTORY COST FLOW

FIFO and average method
Problem 29-1 (AICPA Adapted)
Marsh Company had 150,000 units of product A on hand at January 1, costing ₱21 each.
Purchases of product A during the month of January were:
Units Unit Cost

ACCOUNTING PART 1
January 10 20,000 22
18 250,000 23
28 100,000 24
A physical count on January 31 shows 250,000 units of product A on hand.
What is the cost of the inventory on January 31 under the FIFO method?
a. 5,850,000
b. 5,550,000
c. 5,350,000
d. 5,250,000
January 18 150,000 23 3,450,000

28 100,000 24 2,400,000
Total FIFO cost 250,000 5,850,000
Problem 29-2 (IFRS)
Rona Company used the perpetual inventory system.
The entity reported the following inventory transactions for the month of August:
Aug. 1 Beginning 20,000 4.00 80,000

7 Purchase 10,000 4.20 42,000
10 Purchase 20,000 4.30 86,000
12 Sale 15,000 ? ?
16 Purchase 20,000 4.60 92,000
20 Sale 40,000 ? ?
28 Sale return 3,000 ? ?
The sale return relates to the August 20 sale.
If the FIFO cost flow method is used, the sale return would be costed back into inventory
at what unit cost?
a. 4.00
b. 4.20
c. 4.30
d. 4.60
Solution 29-2 Answer d
Under the perpetual FIFO cost flow, the sale return is costed back into inventory at the
latest unit purchase cost of ₱4.60.
Problem 29-3 (IAA)
Jayson Company used the perpetual system.
The following information has been extracted from the records about one product:

ACCOUNTING PART 1
Jan. 1 Beginning balance 8,000 70.00 560,000
6 Purchase 3,000 70.50 211,500
Feb. 5 Sale 10,000
Mar. 5 Purchase 11,000 73.50 808,500
Mar. 8 Purchase return 800 73.50 58,800
Apr. 10 Sale 7,000
Apr. 30 Sale return 300
If the FIFO cost flow method is used, what is the cost of the inventory
on April 30?
a. 330,750
b. 315,000
c. 433,876
d. 329,360
From March 5 purchase (4,500 units x 73.50) 330,750
Whether periodic or perpetual system, the FIFO inventory is the same.
Problem 29-4 (IAA)
Mildred Company is a wholesaler of office supplies. The FIFO periodic inventory is

used.
The entity reported the following activity for inventory of calculators during the month of
August:
Units Cost
August 1 Inventory 20,000 36.00

7 Purchase 30,000 37.20
12 Sale 36,000
21 Purchase 48,000 38.00
22 Sale 38,000
29 Purchase 16,000 38.60
What is the ending inventory on August 31?
a. 1,500,800
b. 1,501,600
c. 1,522,880
d. 1,529,600
Solution 29-4 Answer d
Beginning inventory 20,000

Purchases (30,000 + 48,000 + 16,000) 94,000
Total units available 114,000
Sales (36,000 + 38,000) ( 74,000)
Ending inventory in units 40,000
From August 21 purchase (24,000 x 38.00) 912,000

From August 29 purchase (16,000 x 38.60) 617,600
Total cost of inventory, August 31 1,529,600
ACCOUNTING PART 1
III. Viable and Vibrant Activities
Learning Activities
The teaching-learning process will be conducted through individual reporting by the

student of an assigned portion of the module. Questions and answers will follow every
reporting.
IV. Opportunity to reflect and articulate students’ acquired knowledge.
Purpose of the activity
It is hoped that the class activity will give each student the opportunity to vocalize a
portion of the learning material, thus allowing the student to experience deeper
attachment with the subject matter on hand.
Criteria for Evaluation
Written Works (WW)

Any specified written task that the instructor will give to the student, (20%).
Performance Tasks (PT)

Reporting in class of an assigned learning material, (30%).
Attendance in meetings, (15%). Joining an on-going Google meet or joining an
in-person meeting will be denied for those coming late, more than 45 minutes
after the official start time of the meeting.
Punctuality in the submission of every task, attitude and behavior, and bonuses
earned in class, (15%).
Term Assessments (TA)

Midterm or final term examination, (20%).
Term Grade (TG) = 20% WW + 60% PT + 20% TA

Semestral Grade = 60% Final Term Grade + 40% Midterm Grade
V. Textbooks and Other References
Valix, C.T., Peralta, J.F. and Valix, C.A.M. (2023 – 8). Financial accounting volume 1. Manila: GIC.
Valix, C.T., Peralta, J.F. and Valix, C.A.M. (2023 – 6). Practical financial accounting reviewer volume
1. Manila: GIC.
Valix, C.T., Peralta, J.F. and Valix, C.A.M. (2023 – 1). Intermediate accounting volume 1. Manila:
GIC.
ACCOUNTING PART 1

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MODULE 4 Module Title: Inventories

PROGRAM: BSMA Year Level: II Section ________

COURSE CODE: ACCT09 COURSE DESCRIPTION: Intermediate

At the end of this module, the students should be able to:

(1) define inventory and identify the timing of its recognition.

(2) differentiate between the periodic and the perpetual inventory

(3) measure inventories and apply the cost formulas.

(4) account for inventory write-down and the reversal thereof.

Prepared Reviewed and Checked

AFRO L. REYES, CPA, MBA

WILMA WENG P. CASALME, PhD

Program: BSMA Topic: Inventories

Content Lecture/ Discussion

BSMA 2A, First Semester, AY 2022 - 23

Factory or manufacturing supplies may be referred to as indirect materials.

Goods includible in the inventory

Exception to the legal test

However, in such a case, it is an accepted accounting procedure to record the installment

This is a clear example of economic substance prevailing over legal form.

Who is the owner of goods in transit?

In practice, during an accounting period, the accountant normally records purchases

This procedure is expedient and no material misstatements occur in the financial

Maritime shipping terms

Accounting for inventory

Illustration – Periodic system

1. Purchase of merchandise on account, ₱300,000.

2. Payment of freight on the purchase, ₱20,000.

3. Return of merchandise purchased to supplier, ₱30,000.

Accounts payable 30,000

4. Sale of merchandise on account, ₱400,000 at 40% gross profit.

5. Return of merchandise sold to customer, ₱25,000.

Sales return 25,000

6. Adjustment of ending inventory, ₱65,000.

Merchandise inventory-end 65,000

Illustration - Perpetual system

1. Purchase of merchandise on account, ₱300,000.

Merchandise inventory 300,000

2. Payment of freight on the purchase, ₱20,000.

Merchandise inventory 20,000

3. Return of merchandise purchased to supplier, ₱30,000.

Accounts payable 30,000

4. Sale of merchandise on account, ₱ 400,000 at gross profit of 40%.The cost of

Accounts receivable 400,000

Cost of goods sold 240,000

5. Return of merchandise sold from customer, ₱25,000.The cost of the merchandise

Sales return 25,000

Merchandise inventory 15,000

6. Adjustment of ending inventory.

Inventory shortage or overage

Inventory shortage 10,000

Trade discounts and cash discounts

Thus, trade discounts are not recorded.

The purchase of trade discounts is to encourage trading or increase sales.

List price 500,000

The journal entry to record the purchase is:

Accounts payable 360,000

Accounts payable 360,000

Methods of recording purchases

Illustration - Gross method

1. Purchases on account, ₱200,000, 2/10, n/30.

2. Assume payment is made within the discount period.

Accounts payable 200,000