4.

0 Inventories

INVENTORY – MERCHANDISING

Beginning Inventory P XX
Add: Purchases XX
Cost of Goods Available for Sale P XX
Less: Cost of Goods Sold (XX)
Ending Inventory P XX

INVENTORY - MANUFACTURING

COST OF RAW MATERIALS INVENTORY

Raw Materials, beginning P XX

Add: Purchases XX
Total Cost of Raw Materials Available for Use P XX
Less: Raw Materials, Used (XX)
Raw Materials, End P XX

COST OF WORK IN PROCESS INVENTORY

Work In Process, Beginning P XX

Add: Total Manufacturing Costs
Direct Materials, Used P XX
Direct Labor XX
Factory Overhead XX XX
Total Cost of Goods Put Into Process P XX
Less: Cost Of Goods Manufactured (XX)
Work In Process, End P XX

COST OF FINISHED GOODS INVENTORY

Finished Goods, Beginning P XX

Add: Cost Of Goods Manufactured XX
Total Cost of Goods Available For Sale P XX
Less: Cost Of Goods Sold (XX)
Finished Goods, End P XX

INVENTORY COSTING METHODS

1. First In First Out (FIFO) Method

2. Last In First Out (LIFO) Method
3. Moving Average Method
4. Weighted Average Method
5. Simple Average Method
6. Specific Identification Method

THE LOWER OF COST AND NET REALIZABLE VALUE (LCNRV)

1. Applied to Individual Items

2. Applied to Inventory as a whole
3. Applied to Inventory as a group

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER
 4.0 Inventories

INVENTORY RELATED RATIOS

1. Inventory Turnover Ratio

= Cost of Goods Sold
Average Inventory

2. Average Inventory
= Beginning Inventory + Ending Inventory
2

3. Inventory Turnover Period

= 365
Inventory Turn Over Ratio

GOODS INCLUDIBLE IN THE INVENTORY

As a rule, 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 – Are the goods owned by the entity and needs to be inventoried?

The following items are includible in the inventory:

1. Goods owned and on hand

2. Goods in transit and sold FOB destination
3. Goods in transit and purchased FOB shipping point
4. Goods out on consignment
5. Goods in the hands of salesmen or agents
6. Goods held by customers on approval or on trial

EXCEPTION TO LEGAL TEST

Installment contracts may provide for retention of title by the seller until the selling price is fully
collected.

GOODS IN TRANSIT

The ownership depends on the terms, whether FOB Destination or FOB Shipping Point.
FOB means Free On Board.

FOB Destination

- Ownership of goods is transferred only when the buyer receives the goods at the point of
destination. Therefore, while in transit, goods are still the inventory of the SELLER and
accordingly, he is also the one legally responsible for freight charges and other expenses up
to the point of destination.

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER
 4.0 Inventories

FOB Shipping Point

- Ownership of goods is transferred upon shipment of goods. Therefore, while in transit, goods
are already the inventory of the BUYER and accordingly, he is also the one legally responsible
for freight charges and other expenses from the point of shipment to the point of destination

PRACTICE

- Accountants normally record purchases when goods are received and sales revenue when
goods are shipped, regardless of the time at which title to the goods passed.
- However, invoice terms of goods still in transit at the end of the accounting period should be
checked to determine who has the legal title.
- Accordingly, adjustments are necessary to account if errors are committed in recording sales
and purchases.

FREIGHT TERMS

Freight Collect

- Freight charge on the goods shipped is not yet paid. Common carrier collects freight charge
from the buyer. Buyer paid the freight charge.

Freight Prepaid

- Freight charge on the goods shipped is already paid by the seller.

Notes:

1. The terms FOB destination and FOB Shipping Point determine the ownership of the goods in
transit and the party who should legally pay the freight charge and expenses from the point
of shipment to the destination.
2. The terms Freight collect and Freight prepaid determine the party who actually paid the
freight charge.

MARITIME SHIPPING TERMS

Free Alongside or FAS

- 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 = SELLER.
- Cost of loading & Shipment = BUYER, thus title passes to the buyer when the carrier takes
possession of the goods.

Cost, Insurance, and Freight or CIF

- Buyer agrees to pay in lump-sum the cost of the goods, insurance, and freight charge.
- CF if buyer agrees to pay only the cost of the goods and freight charge.
- Cost of loading = SELLER, thus, title and risk of loss shall pass to the buyer upon delivery of
the goods to the carrier.

Ex – ship

- Seller assumes all the expenses and risk of loss until the goods are unloaded at which time
title and risk of loss shall pass to the buyer.

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER
 4.0 Inventories

CONSIGNED GOODS

- Consigned goods are part of consignor’s inventory and shall be excluded from the consignee’s
inventory.
- Freight and other handling charges on goods out on consignment are part of the cost of goods
consigned.
- Consignee remits cash to the consignor for sales on goods consigned net of commission
agreed and other expenses chargeable to the consignor.

- Journal Entries (book of consignor):

1. Memorandum Entry to record consigned goods.
2. To record sales of goods consigned.
Cash xx
Commission xx
Expenses xx
Sales xx

SYSTEMS FOR ACCOUNTING OF INVENTORIES

1. Periodic System
- Calls for the physical counting of goods on hand at the end of accounting period to
determine quantities.
- Generally used when the individual inventory items have small peso investment.

2. Perpetual System
- Requires maintenance of records called stock cards.
- Generally used when the individual inventory items have large peso investment.
- The entity would be able to know the inventory on hand at a particular moment in time.

PERIODIC SYSTEM

Journal Entries:

Item # Description Debit Credit

1 Purchases XX
Accounts Payable XX
To record purchases on account.
#
2 Freight In XX
Cash XX
To record payment of freight
#
3 Accounts Payable XX
Purchase return XX
To record return of merchandise
purchased
#

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER
 4.0 Inventories

Item # Description Debit Credit

4 Accounts Receivable XX
Sales XX
To record sale of merchandise on account.
#
5 Sales Return XX
Accounts Receivable XX
To record return of merchandise sold.
#
6 Merchandise Inventory, end XX
Income Summary XX
To record adjustment of ending inventory

PERPETUAL SYSTEM

Journal Entries:

Item # Description Debit Credit

1 Merchandise Inventory XX
Accounts Payable XX
To record purchases on account.
#
2 Merchandise Inventory XX
Cash XX
To record payment of freight
#
3 Accounts Payable XX
Merchandise Inventory XX
To record return of merchandise
purchased
#
4 Accounts Receivable XX
Sales XX
Cost of Goods Sold XX
Merchandise Inventory XX
To record sales on account and cost of
merchandise sold
#
5 Sales Return XX
Accounts Receivable XX
Merchandise Inventory XX
Cost of Goods Sold XX
To record return of merchandise sold.
#
6 Merchandise inventory, end is not adjusted. The balance of the merchandise inventory
account represents the ending inventory.

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER
 4.0 Inventories

INVENTORY SHORTAGE OR OVERAGE

Merchandise Inventory Account > Physical Count = Inventory SHORTAGE

Merchandise Inventory Account < Physical Count = Inventory OVERAGE

TRADE DISCOUNTS & 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.
- Not recorded

Cash Discounts

- Are deductions from the invoice price when payment is made within the discount period.
- Recorded as purchase discount by the buyer and sales discount by the seller.

List Price P XX
Less: Trade Discount (XX)
INVOICE PRICE P XX PAYMENT (beyond discount period)
Less: Cash Discount (XX)
PAYMENT (within discount period) P XX

METHODS OF RECORDING PURCHASES

1. Gross Method – Purchases and Accounts Payable are recorded at GROSS.

2. Net Method – Purchases and Accounts Payable are recorded at NET.

GROSS METHOD:

Item # Description Debit Credit

Assume:
3% discount, if paid within the discount period
1 Purchases (@invoice price) XX
Accounts Payable (@invoice price) XX
To record purchases on account
#
2 Accounts Payable (100%) XX
Cash (97%) XX
Purchase Discount ( 3%) XX
To record payment within the discount period.
#
3 Accounts Payable (100%) XX
Cash (100%) XX
To record payment beyond the discount period.

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER
 4.0 Inventories

NET METHOD:

Item # Description Debit Credit

Assume:
3% discount, if paid within the discount period
1 Purchases (@97%) XX
Accounts Payable (@97%) XX
To record purchases on account
#
2 Accounts Payable (97%) XX
Cash (97%) XX
To record payment within the discount period.
#
3 Accounts Payable (97%) XX
Purchase Discount lost (3%) XX
Cash (100%) XX
To record payment beyond the discount period.
* Purchase Discount lost – other expense – income statement

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER
 4.0 Inventories

MERCHANDISE INVENTORY

ILLUSTRATIVE PROBLEM 1

Transactions:

JANUARY

1. The company started its operations in January

2. Purchase 100 units of ballpen
3. Sold 30 units of ballpen purchased.

FEBRUARY

1. February, the second month of operation

2. Purchase 80 units of ballpen
3. Sold 100 units of ballpen

REQUIRED: Compute the following:

1. Total goods available for sale (Units) – January = _______________

2. Ending Inventory (Units) – January = _______________
3. Total goods available for sale (units) – February = _______________
4. Ending Inventory (Units) – February = _______________

FIRST IN FIRST OUT (FIFO) METHOD

ILLUSTRATIVE PROBLEM 2

DATE PURCHASES SALES BALANCE

Jan 1,000 units @ P30
March 800 units @ P40
June 300 units @ P35
Aug 200 units @ P40
Oct 600 units @ P45
Dec 100 units @ P50

REQUIRED: Compute the following:

1. Cost of units sold on March = _______________

2. Cost of Goods Available For Sale – June = _______________
3. Cost of Goods Available For Sale – Aug = _______________
4. Cost of units sold on October = _______________
5. Cost of ending inventory = _______________
6. Cost of goods sold for the year = _______________
7. Gross Profit for the year = _______________

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER
 4.0 Inventories

LAST IN FIRST OUT (LIFO) METHOD

ILLUSTRATIVE PROBLEM 3

DATE PURCHASES SALES BALANCE

Jan 1,000 units @ P30
March 800 units @ P40
June 300 units @ P35
Aug 200 units @ P40
Oct 600 units @ P45
Dec 100 units @ P50

REQUIRED: Compute the following:

1. Cost of units sold on March = _______________

2. Cost of Goods Available For Sale – June = _______________
3. Cost of Goods Available For Sale – Aug = _______________
4. Cost of units sold on October = _______________
5. Cost of ending inventory = _______________
6. Cost of goods sold for the year = _______________
7. Gross Profit for the year = _______________

MOVING AVERAGE METHOD

ILLUSTRATIVE PROBLEM 4

DATE PURCHASES SALES BALANCE

Jan 1,000 units @ P30
March 800 units @ P40
June 300 units @ P35
Aug 200 units @ P40
Oct 600 units @ P45
Dec 100 units @ P50

REQUIRED: Compute the following:

1. Cost of units sold on March = _______________

2. Cost of Goods Available For Sale – June = _______________
3. Cost of Goods Available For Sale – Aug = _______________
4. Cost of units sold on October = _______________
5. Cost of ending inventory = _______________
6. Cost of goods sold for the year = _______________
7. Gross Profit for the year = _______________

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER
 4.0 Inventories

WEIGHTED AVERAGE METHOD

ILLUSTRATIVE PROBLEM 5

DATE PURCHASES SALES BALANCE

Jan 1,000 units @ P30
March 800 units @ P40
June 300 units @ P35
Aug 200 units @ P40
Oct 600 units @ P45
Dec 100 units @ P50

REQUIRED: Compute the following:

1. Cost of ending inventory = _______________

2. Cost of goods sold for the year = _______________
3. Gross Profit for the year = _______________

SPECIFIC IDENTIFICATION METHOD

ILLUSTRATIVE PROBLEM 6

DATE PURCHASES SALES BALANCE

January 1,000 units @ P30
February 500 units @ P35
March 800 units @ P40
June 300 units @ P40
August 200 units @ P45
October 600 units @ P50
November 350 units @ P50
December 100 units @ P50

Additional Information: 1. Units sold on March all came from Beginning Inventory.
2. Units sold on October came from:
a. 200 units from February Purchases
b. 150 units from June Purchases
c. 150 units from August Purchases
d. Beginning Inventory
3. Units sold on November came from:
a. the remaining units of beginning inventory
b. the remaining units of August Purchases
c. 150 units from February Purchases
d. June Purchases

REQUIRED: Compute the following:

1. Cost of units sold on March = _______________

2. Cost of units sold on October = _______________
3. Cost of units sold on November = _______________
4. Cost of ending inventory = _______________
5. Cost of goods sold for the year = _______________
6. Gross Profit for the year = _______________

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER
 4.0 Inventories

COST OF RAW MATERIALS INVENTORY

ILLUSTRATIVE PROBLEM 7

JAN FEB MARCH

Raw Materials, Beg P 0 P ? P ?
Purchases 100,000 110,000 55,000
Raw Materials, Used 60,000 80,000 35,000

REQUIRED: Compute for the following

JAN FEB MARCH
Raw Materials ? ? ?
Available For Use
Raw Materials, ? ?
Beginning
Raw Materials, End ? ? ?

COST OF WORK IN PROCESS INVENTORY

ILLUSTRATIVE PROBLEM 8

The following balances are taken from the Work In Process Inventory Account of TTea
Company
JAN FEB MARCH
Work In Process, Beg P 20,000 P ? P ?
Direct Materials, Used 25,500 30,600 35,700
Direct Labor Costs 15,000 18,000 21,000
Factory Overhead 15,500 18,600 21,700
Costs Of Goods 64,500 67,500 75,600
Manufactured
No. Of Units Produced 1,000 units 1,200 units 1,400 units

REQUIRED:
1. Compute the following costs for January to March
a. Prime Costs
b. Conversion Costs
c. Total Manufacturing Costs
d. Total Costs of Goods Put Into Process
e. Work In Process, Ending
f. Unit Costs

2. Prepare necessary journal entries

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER
 4.0 Inventories

COST OF FINISHED GOODS INVENTORY

ILLUSTRATIVE PROBLEM 9

Continuing the Illustrative Problem 8 and assume the following figures for the Finished Goods
Inventory Account of TTea Company.

REQUIRED:

1. Complete the missing figures.

JAN FEB MARCH

Finished Goods, Beg. P 0 ? ?
Cost of Goods 64,500 67,500 75,600
Manufactured
Costs of Goods ? ? ?
Available for Sale
Cost of Goods Sold 51,600 59,900 66,100
Finished Goods, End ? ? ?

2. Prepare Necessary Journal Entries

SUMMARY OF ILLUSTRATIVE PROBLEM 7 – 9

REQUIRED: Fill - up the required figures generated from Illustrative Problems 7 to 9.

INVENTORIES – Cost JAN FEB MARCH

Raw Materials, End ? ? ?
Work In Process, End ? ? ?
Finished Goods, End ? ? ?

THE LOWER OF COST AND NET REALIZABLE VALUE (LCNRV)

ILLUSTRATIVE PROBLEM 10

The following data relates to the materials inventory of the LCNRV Company:

Units Unit Costs NRV

GROUP 1
Material A 60 P 140 P 130
Material B 430 85 90
GROUP 2
Material C 890 P 120 P 145
Material D 180 65 55

REQUIRED:

What is the value of the inventory if the lower of cost or net realizable value (LCNRV) is applied to

1. Individual Items = _______________

2. Inventory as a whole = _______________

3. Inventory by groups = _______________

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER
 4.0 Inventories

RATIO ANALYSIS

ILLUSTRATIVE PROBLEM 11
GIVEN:
Sales = P 1,000,000
Gross Profit Rate = 60% of sales
Beginning Inventory = 60,000
Ending Inventory = 100,000

REQUIRED:
Compute for the following:

1. Average Inventory = _______________

2. Inventory Turnover Ratio = _______________
3. Inventory Turnover Period = _______________

RATIO ANALYSIS

ILLUSTRATIVE PROBLEM 12
GIVEN:
Beginning Inventory = 5,000
Ending Inventory = 15,000
Inventory Turnover Period = 36.5

REQUIRED:
Compute for the following:

1. Average Inventory = _______________

2. Inventory Turnover Ratio = _______________
3. Cost of Goods Sold = _______________

RATIO ANALYSIS

ILLUSTRATIVE PROBLEM 13
GIVEN:
Inventory Turnover Period = 91.25
Beginning Inventory = 250,000
Gross Profit on Sales = P 525,000
Gross Profit Rate = 35% of sales

REQUIRED:
Compute for the following:

1. Inventory Turnover Ratio = _______________

2. Sales = _______________
3. Cost of Goods Sold = _______________
4. Average Inventory = _______________
5. Ending Inventory = _______________

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER
 4.0 Inventories

PERIODIC & PERPETUAL SYSTEM

ILLUSTRATIVE PROBLEM 14

The following 2020 transactions are to be recorded in the book of Taylo Company.

1. Purchases of merchandise on account, P500,000.

2. Payment of freight on the purchase P30,000.
3. Return of merchandise purchased to supplier P50,000.
4. Sale of merchandise on account P750,000, at 40% gross profit.
5. Return of merchandise sold from customer, P25,000.
6. Adjustment of ending inventory, P45,000.

REQUIRED:

Prepare journal entries assuming the company uses:

a. Periodic system
b. Perpetual system

GROSS METHOD & NET METHOD

ILLUSTRATIVE PROBLEM 15
The list price of a merchandise purchased is P500,000 less 15% and 20%, with credit terms 10/10,
5/15, n/30

REQUIRED:

1. Compute the following:

a. Trade discounts = _______________
b. Invoice Price = _______________
c. Cash discount if paid within the 10 days discount period. = _______________
d. Cash Payment if paid within the 10 days discount period. = _______________
e. Cash discount if paid within the 15 days discount period. = _______________
f. Cash Payment if paid within the 15 days discount period. = _______________
g. Cash Payment if paid beyond the discount period. = _______________

2. Prepare necessary journal entries assuming you record purchases using the:
a. Gross Method
b. Net Method

Tyron C. Taylo
DEPARTMENT OF MANAGEMENT - BM CLUSTER