COLLEGE OF BUSINESS AND ACCOUNTANCY

Topic: Inventories Part II

Learning Objectives:
● Measure inventories and apply the cost formulas.

● Account for inventory write-down and the reversal thereof.

Core Value/Biblical Principles:

Colossians 3:16
Let the message of Christ dwell among you richly as you teach and admonish one another with all wisdom
through psalms, hymns, and songs from the Spirit, singing to God with gratitude in your hearts.

Learning Activity:
IAS 2 provides guidance for determining the cost of inventories and the subsequent recognition of the cost as
an expense, including any write-down to net realizable value. It also provides guidance on the cost formulas
that are used to assign costs to inventories.

Introduction:
IAS 2 Inventories contains the requirements on how to account for most types of inventory. The standard
requires inventories to be measured at the lower of cost and net realizable value (NRV) and outlines
acceptable methods of determining cost, including specific identification (in some cases), first-in first-out
(FIFO) and weighted average cost.

Body:

MEASUREMENT
Inventories are measured at the lower of cost and net realizable value.

I. COST

The cost of inventories comprises the following:

a. Purchase cost - this includes the purchase price (net of trade discounts and other rebates), import
duties, non-refundable or non-recoverable purchase taxes, and transport, handling and other costs
directly attributable to the acquisition of the inventory.
o Purchase cost excludes refundable or recoverable taxes.
o Trade discounts, rebates and other similar items are deducted in determining the purchase
cost.

b. Conversion costs - these refer to the costs necessary in converting raw materials into finished
goods.

c. Other costs necessary in bringing the inventories to their present location and condition.

The following are excluded from the cost of inventories and are expensed in the period in which they are
incurred:
a. Abnormal amounts of wasted materials, labor or other production costs.
b. Selling costs, e.g., advertising and promotion costs and delivery expense or freight out.
c. Administrative overheads that do not contribute to bringing inventories to their present location and
condition; and
d. Storage costs unless those costs are necessary in the production stage.
● Storage costs of partly finished or partly completed goods are capitalized as cost of
inventory, e.g., storage cost of wine during fermentation.
 ● Storage costs of finished or completed goods are expensed,
e.g., warehousing costs of completed inventories.

ILLUSTRATION 1: Cost of purchase

ABC Co., a VAT payer, imported goods from a foreign supplier and incurred the following costs:

Purchase price 100,000

Import duties 10,000
Value added tax 13,000
Transportation and handling costs 5,000
Commission to broker ___2,000
TOTAL 130.000

Requirement: How much is the purchase cost of the goods?

Inventory 117,000
Input VAT 13,000
Cash 130,000

If the purchaser is not a VAT payer, the VAT paid is capitalized as cost of inventory because, for a non-
VAT business, any VAT paid is considered non-refundable/non-recoverable.

Trade discounts and Cash discounts

● Trade discounts given to encourage orders in ● Cash discounts given to encourage prompt
large quantities. payment.
● deducted from the list price when determining ● deducted from the invoice price when
the invoice price. determiningthe amount of net payment
required within the discount period.
● not recorded in the books of either the buyer or
the seller. ● reflected in the books of the buyer and seller.

Accounting for cash discounts

The two accounting methods for cash discounts are:

a. Gross Method - The cost of inventory and accounts payable are recorded gross of cash discounts.
● Cash discounts are recorded under the "Purchase discounts" account only when taken. Purchase
discounts is deducted from gross purchases when computing for net purchases.

b. Net Method - The cost of inventory and accounts payable are initially recorded net of cash discounts,
whether taken or not.
● Cash discounts not taken are recorded under the "Purchase discounts lost" account and included
as part of "other expense" or as "finance cost" (interest expense).

ILLUSTRATION 2: Accounting for cash discounts

An entity purchases inventory with a list price of P10,000 on account under credit terms of 20%, 10%, 2/10,
n/30.

GROSS METHOD NET METHOD

Purchase of inventory

Purchases 7,200 Purchases 7,056

Accounts payable 7,200 Accounts payable 7,056

Assume payment is made within discount period.

Accounts Payable 7,200

Accounts Payable 7,056
Purchase Discounts 144
Cash 7,056
Cash 7,056

Assume payment is made beyond discount period.

Accounts Payable 7,056

Accounts Payable 7,200
Purchase Discounts Lost 144
Cash 7,200
Cash 7,200

Conversion costs
Conversion costs refer to direct labor and manufacturing overhead that are necessary in
converting raw materials into finished goods.
Manufacturing overhead (a.k.a. factory overhead, factory burden, production overhead and
manufacturing support costs) refers to costs that are not directly traceable to the finished goods but are
necessary in producing those goods
Examples: depreciation on factory equipment, cost of electricity to run factory equipment

Manufacturing overhead is classified into:

1. Variable production overheads are indirect costs of production that vary directly with the volume
of production, such as indirect materials and indirect labor.
2. Fixed production overheads are indirect costs of production that remain relatively constant
regardless of the volume of production, such as depreciation and maintenance of factory buildings
and equipment, and cost of factory management and administration.

Allocation of Production Overheads

1. Fixed production overheads are allocated to the costs of conversion based on the normal capacity
of the production facilities.
● Normal capacity is the production expected to be achieved on average over a number of periods
or seasons under normal circumstances, taking into account the loss of capacity resulting from
planned maintenance.
● The actual level of production may be used if it approximates normal capacity. The amount of fixed
overhead allocated to each unit of production is not increased as a consequence of low production
or idle plant.
● Unallocated overheads are recognized as expenses in the period in which they are incurred.

2. Variable production overheads are allocated to each unit of production based on the actual use of
the production facilities.

Absorption Costing and Variable Costing

 1. Absorption (Full) Costing is a costing method in which both fixed and variable production
overheads are included in the cost of inventories.

2. Variable Costing is a costing method in which only variable production overhead is included in the
cost of inventories. Fixed production overhead is expensed immediately.

PAS 2 requires the use of absorption costing. Variable costing is used only for internal reporting purposes.

Joint and By-products

A production process may result in more than one product being produced simultaneously. This is
the case, for example, when joint products are produced (i.e., main product and a by-product).

When the conversion costs of each product are not separately identifiable, they are allocated between
the products on a rational and consistent basis. The allocation may be based, for example, on the relative sales
value of each product either at the stage in the production process when the products become separately
identifiable, or at the completion of production.
Most by-products, by their nature, are immaterial. When this is the case, they are often measured at
net realizable value and this value is deducted from the cost of the main product. As a result, the carrying
amount of the main product is not materially different from its cost.

Standard Cost System

Standard costs are budgeted inventory unit costs established to motivate optimal productivity and
efficiency. Standard costs take into account normal levels of materials and supplies, labor, efficiency and
capacity utilization. They are regularly reviewed and, if necessary, revised in the light of current conditions.
A Standard Cost System is designed to alert management when the actual costs of production differ
significantly from target or standard costs. The use of a standard cost system is allowed under PAS 2 for
convenience provided the results approximate cost.

Borrowing Costs
Borrowing cost (interest) forms part of the cost of inventory only if it is incurred on borrowings
taken to finance the acquisition or production of inventory that meets the definition of a qualifying asset. A
qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use
or sale.
All other interests are charged as expenses.

Deferred Settlement Terms

When payment for purchases is deferred and the arrangement effectively contains a financing
element, the difference between the purchase price for normal credit terms and the amount paid is
recognized as interest expense over the period of the financing.

ILLUSTRATION 3: Deferred Payment

On January 1, 20x1 ABC Co. acquired goods for sale in the ordinary course of business for P100,000, including
P5,000 refundable purchase taxes. The supplier usually sells goods on 30 days' interest-free credit. However,
as a special promotion, the purchase agreement for these goods provided for payment to be made in full on
December 31, 20?1. In acquiring the goods, transport charges of P2,000 were paid on January 1, 20x1. An
appropriate discount rate is 10% per year.

REQUIREMENT: Compute for the initial cost of the inventories.

Total purchase price 100,000

Refundable purchase taxes (e.g ., Value added tax) (5,000)
Purchase price excluding refundable purchase taxes 95,000
Multiply by: PV of P1 @10%, n=1 0.90909
Cash price equivalent of inventory purchased 86,364
 Transport costs (Freight-in) 2,000
Initial cost of inventories 88,364

Cost of Agricultural Produce Harvested from Biological Assets

Inventories comprising agricultural produce harvested from biological assets are initially measured
at fair value less cost to sell at the point of harvest in accordance with PAS 41 Agriculture. This will be the
deemed cost for subsequent measurement at the lower of cost and net realizable value using PAS 2.

Cost of Inventories Purchased in Lump Sum

The cost of different inventories having different values purchased on a lump sum basis is allocated
to the inventories based on their relative sales prices.

ILLUSTRATION 4: Purchase in lump sum

ABC Co. acquired a tract of land for P1,000,000. The land was developed and subdivided into residential lots
at an additional cost of P200,000. Although the subdivided lots are relatively equal in sizes, they were offered
at different sales prices due to differences in terrain. Information on the subdivided lots is shown below:

Lot Group No. of Lots Price per Lot

A 4 400,000

B 10 200,000

C 15 160,000

REQUIREMENT: Compute for the allocated costs of the groups of lots.

Lot Groups No. of Lots Price per Lot Total price per Allocation Allocated Costs
lot group

a b c=axb

A 4 400,000 1,600,000 1.2M x (1.6/6) 320,000

B 10 200,000 2,000,000 1.2M x (2/6) 400,000

C 15 160,000 2,400,000 1.2M x (2.4/6) 480,000

6,000,000 1,200,000

The cost per lot in group is computed as follows:

Lot Groups Allocated Costs No. of Lots cost per lot

a b c=a÷b

A 320,000 4 80,000

B 400,000 10 40,000

C 480,000 15 32,000

1,200,000

Cost formulas
 One of the major objectives of inventory accounting is the determination of costs of inventories
recognized as expense when the related revenues are recognized. This is important for the proper
determination of periodic income. Proper determination of such costs may be obtained by selecting an
appropriate cost formula from the following:

1. Specific identification - this shall be used for inventories that are not ordinarily interchangeable (i.e .,
those that are individually unique) and those that are segregated for specific projects.
Under this formula, specific costs are attributed to identified items of inventory. Accordingly, cost of
sales represents the actual costs of the specific items sold while ending inventory represents the actual
costs of the specific items on hand.

2. First-In, First-Out (FIFO) - Under this formula, it is assumed that inventories that were purchased or
produced first are sold first, and therefore unsold inventories at the end of the period are those most
recently purchased or produced.
Accordingly, cost of sales represents costs from earlier purchases while the cost of ending inventory
represents costs from the most recent purchases.

3. Weighted Average - Under this formula, cost of sales and ending inventory are determined based on the
weighted average cost of beginning inventory and all inventories purchased or produced during the
period. The average may be calculated on a periodic basis or as each additional purchase is made,
depending upon the circumstances of the entity.
The cost formulas refer to "cost flow assumptions," meaning they pertain to the flow of costs (i.e .,
from inventory to cost of sales) and not necessarily to the actual physical flow of inventories. Thus, the
FIFO or Weighted Average can be used regardless of which item of inventory is physically sold first.

Same cost formula shall be used for all inventories with similar nature and use. Different cost formulas may be
used for inventories with different nature or use. PAS 2 does not permit the use of a last-in, first out (LIFO) cost
formula.

ILLUSTRATION 5: Cost formulas

ABC Co. is a wholesaler of guitar picks. The activity for product "Pick X" during August is shown below:

Date Transaction Units Unit Cost Total Cost

08 - 01 Inventory 2,000 36.00 72,000
08 - 07 Purchase 3,000 37.20 111,600
08 - 12 Sales 4,200
8 - 13 Sales Return 600
8 - 21 Purchase 4,800 38.00 182,400
8 - 22 Sales 3,800
8 - 29 Purchase 1,900 38.60 73,340
8 - 30 Purchase Return 300 38.60 (11,580)
Total Goods Available for Sale ₱427,760

REQUIREMENTS: Compute for the (a) ending inventory and (b) cost of goods sold under the following cost
formulas:
1. FIFO - periodic
2. FIFO - perpetual
3. Weighted average - periodic
4. Weighted average - perpetual

1. FIFO - PERIODIC
Beginning inventory in units 2,000
Net purchases in units (3,000 + 4,800 + 1,900- 300) 9,400
Total goods available for sale in units 11,400
 Total goods available for sale in units 11,400
Quantity of goods sold (4,200 - 600 + 3,800) (7,400)
Ending inventory in units 4,000

Using the concept that the cost of ending inventory under FIFO is from the cost of the most recent purchase,
the ending inventory in units is allocated as follows:

Units Unit Cost Total Cost

Ending Inventory to be allocated 4,000
Allocated as follows:
From Aug. 29 net purchases (1900 - 300) (1,600) ₱38.60 ₱61,760
Balance to be allocated to the next most recent purchase date 2,400
From Aug. 21 purchase (2,400) 38.00 91,200
Ending Inventory at Cost ₱152,960

Cost of Goods Sold is computed as follows:

Total Goods available for Sale 427,760
Ending inventory at cost (152,960)
Cost of Goods Sold ₱274,800

2. FIFO - PERPETUAL

Date Transaction Units Unit Cost Total Cost

1 Aug Inventory 2,000 ₱36.00 ₱72,000
7 Aug Purchase 3,000 37.20 111,600
12 Aug Net Sales 3,600
Allocation:
from Beg. Inventory (2,000) 36.00 (72,000)
from Aug. 7 purchase (1,600) 37.20 (59,520)
21 Aug Purchase 4,800 38.00 182,400
22 Aug Sales 3,800
Allocation:
from Aug. 7 purchase (1,400) 37.20 (52,080)
from Aug. 21 purchase (2,400) 38.00 (91,200)
29 Aug Net Purchases 1,600 38.60 61,760
Ending Inventory at Cost ₱152,960

Cost of Goods Sold is computed as follows: 72,000 + 59,520 + 52,080 + 91,200 = ₱274,800

3. WEIGHTED AVERAGE – PERIODIC

The weighted average unit cost is computed as follows:

Weighted Ave. Total Goods available for Sale (TGAS in Pesos)

Unit Cost = Total Goods available for Sale (TGAS in Units)

Weighted Ave. ₱427,760

= ₱37.52
Unit Cost = 11,400

Ending inventory in units 4,000

Multiply by: Weighted average unit cost ₱37.52
Ending inventory at cost ₱150,080

Total goods available for sale in pesos 427,760

Ending inventory at cost (150,080)
Cost of Goods Sold ₱277,680

4. WEIGHTED AVERAGE - PERPETUAL (MOVING AVERAGE)

A new weighted average unit cost is computed after every purchase. Cost of goods sold is determined using
the moving average unit cost on the date of sale.

Date Transaction Units Unit Cost Total Cost

1 Aug Inventory 2,000 ₱36.00 ₱72,000
7 Aug Purchase 3,000 37.20 111,600
Moving Ave. Unit Cost 5,000 ₱36.72 ₱183,600
12 Aug Sales (4,200) 36.72 (154,224)
Sales Return 600 36.72 22,032
21 Aug Purchase 4,800 38.00 182,400
Moving Ave. Unit Cost 6,200 ₱37.71 ₱233,808
22 Aug Sales (3,800) 37.71 (143,298)
29 Aug Purchase 1,900 38.60 73,340
Purchase Return (300) 38.60 (11,580)
Ending Inventory in Units and at Cost 4,000 ₱152,270

Cost of Goods Sold is computed as follows: P154,224 - P22,032 + P143,298 = ₱275,490

ILLUSTRATION 6: FIFO vs LIFO

Units Unit Cost Total Cost

Beginning - Aug. 1 800 ₱1.00 800
Purchases - August 14 1,000 2.00 2,000
Purchases - August 21 1,200 2.50 3,000
Total Goods Available for Sale 3,000 ₱ 5,800

Units on hand on August 31 .... 500

REQUIREMENTS: Compute for the following:

a. Ending inventory and cost of goods sold under FIFO.
b. Ending inventory and cost of goods sold under LIFO.

Requirement (a): FIFO

Ending inventory in units 500
Multiply by: Unit cost from latest purchase (Aug. 21) 2.50
Ending inventory in pesos ₱1,250

Total goods available for sale in pesos 5,800

Ending inventory at cost (1,250)
Cost of goods sold ₱4,550

Requirement (b); LIFO

Ending inventory in units 500
Multiply by: Unit cost from beginning inventory 1.00
Ending inventory in pesos ₱500

Total goods available for sale in pesos 5,800

Ending inventory at cost (500)
Cost of goods sold ₱5,300
 ILLUSTRATION 7: FIFO vs LIFO

With LIFO, cost of goods sold is P390,000 and ending inventory is P90,000. If FIFO ending inventory is
P130,000, how much is FIFO cost of goods sold?

CGAS/TGAS 480,000
FIFO ending inventory (given) (130,000)
FIFO cost of goods sold ₱350,000

II. NET REALIZABLE VALUE (NRV)

Inventories are measured at the lower of cost and net realizable value.
Net realizable value is "the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale."
NRV is different from fair value. "Net realizable value refers to the net amount that an entity expects
to realize from the sale of inventory in the ordinary course of business. Fair value reflects the price at which
an orderly transaction to sell the same inventory in the principal (or most advantageous) market for that
inventory would take place between market participants at the measurement date. The former is an entity-
specific value; the latter is not. Net realizable value for inventories may not equal fair value less costs to sell."
Measuring inventories at the lower of cost and NRV is in line with the basic accounting concept that
an asset shall not be carried at an amount that exceeds its recoverable amount. The cost may exceed the
recoverable amount if, for example, the inventory is damaged, becomes complete obsolete, or prices to sell
have the declined, inventory or have the estimated costs to circumstances, the cost of the inventory is
increased. In these written-down to NRV.

Write-down of inventory
Inventories are usually written down to net realizable value on an item-by-item basis.
If the cost of an inventory exceeds its NRV, the inventory is written down to NRV, the lower amount.
The excess of cost over NRV represents the amount of write-down.

ILLUSTRATION 8: Write-down of inventory

Information on ABC Co.'s inventories onDec. 31, 20x1 is as follows: (All costs are borne by ABC Co.) 10

Product X Product Y
Number of units 2,000 3,000
Purchase cost (per unit) ₱100 ₱200
Delivery cost from supplier (per unit) 20 30
Estimated selling price (per unit) 150 250
Selling costs (per unit) 22 40
General and administrative (per unit) 15 18

REQUIREMENTS:
a. Compute for the amount of write-down. Provide the entry.
b. Compute for the valuation of the inventories in ABC's December 31, 20x1 statement of financial position.
Requirement (a): Write-down of raw materials
Product X Product Y
Cost
Purchase Cost 100 200
Delivery cost from supplier (freight in) 20 30
Cost per unit ₱120 ₱230

Net Realizable Value

Estimated selling price 150 250
Selling costs (22) (40)
NRV per unit ₱128 ₱210

Lower of Cost and NRV ₱120 ₱210

Write Down 60,000

Journal Entry:
12/31/20x1 Cost of Goods Sold 60,000
Inventory 60,000

Requirement (b): Inventory Valuation

Product X Product Y
Lower of Cost and NRV 120 210
Multiply by: Number of Units 2000 3000
Inventory, December 31, 20x1 ₱240,000 ₱630,000

Write-down of Raw Materials

Raw materials inventory is not written down below cost if the finished goods in which they will be
incorporated are expected to be sold at or above cost. If, however, this is not the case, the raw materials are
written down to their NRV. The best evidence of NRV for raw materials is replacement cost.

ILLUSTRATION 9: Write-down of Raw Materials

Information on Entity A's inventories is as follows:

Raw materials Finished goods
Cost 60,000 100,000
Replacement cost/NRV 50,000 120,000

REQUIREMENT: Compute for the valuation of the inventories in Entity A's statement of financial position.

P160,000 TOTAL COST (60,000 cost of raw materials + 100,000 cost of finished goods).

The raw materials need not be written down to replacement cost because the cost of the finished goods
is less than the NRV (100,000 cost<120,000NRV).

Reversal of Write-Downs
The amount of reversal to be recognized should not exceed the amount of the original write-down
previously recognized.

ILLUSTRATION 10:
Information on ABC Co.'s inventories is as follows:

20x2 20x1
Inventory, December 31 at cost 300,000 240,000
Inventory, December 31 at NRV 330,000 220,000
Cost of goods sold before adjustments 1,800,000 2,000,000

REQUIREMENTS:
a. Provide journal entries in 20x1 and 20?2.
b. Compute for the (a) adjusted ending inventories and (b) costs of goods sold as of Dec. 31, 20x1 and 20x2.
Assume that all write-downs are not considered material.

Requirement (a):
Write-down:
12/31/20x1 Cost of goods sold 20,000
Inventory 20,000

Reversal of write-down:
12/31/20x2 Inventory 20,000
Cost of goods sold 20,000

Requirement (b):
20x1 20x2
Cost 240,000 300,000
(Write-down) / Reversal (20,000) 20,000
Adjusted Ending Inventories 220,000 320,000

20x1 20x2
Unadjusted Cost of Goods Sold 2,000,000 1,800,000
(Write-down) / Reversal 20,000 (20,000)
Adjusted Cost of Goods Sold 2,020,000 1,780,000

Variation: Material/Abnormal write-down

If the write-down is considered material or have resulted from abnormal loss, the write-down would be
charged as loss. Consequently, the reversal is recognized as gain.

The journal entries would be as follows:

12/31/20x1 Impairment Loss 20,000
Inventory 20,000

12/31/20x2 Inventory 20,000

Gain 20,000

Purchase Commitments
A firm purchase commitment is "an agreement with an unrelated party, binding on both parties and
usually legally enforceable, that
a. specifies all significant terms, including the price and timing of the transactions, and
b. includes a disincentive for non-performance that is sufficiently large to make performance
highly probable."

A contracting party under a firm purchase commitment cannot cancel the contract without suffering
penalty. Thus, the buyer has to accept future delivery even if the goods promised to be purchased become
impaired. In such case, the buyer recognizes loss on purchase commitment.
When prices subsequently increase, the buyer recognizes gain on purchase commitment. However,
the gain should not exceed the loss on purchase commitment previously recognized.
ILLUSTRATION 11: Purchase commitment

On January 1, 20x1, ABC Co. signed a three-year, non-cancelable purchase contract that allows ABC Co. to
purchase up to 60,000 units of a microchip annually from XYZ Co. at P25 per unit. The guaranteed minimum
purchase is 15,000 units per year. At yearend, it was found out that the goods are obsolete. ABC Co. had
10,000 units of this inventory at December 31, 20x1, and believes these parts can be sold as scrap for P5 per
unit.

REQUIREMENT: Compute for the loss on purchase commitment to be recognized on December 31, 20x1.

Guaranteed minimum annual purchase 15,000

Multiply by: Remaining yrs. in the contract 2____
Total goods to be accepted in the future 30,000
Multiply by: Purchase price per unit less salvage value 20___
Loss on purchase commitment 600,000

12/31/20x1 Loss on Purchase Commitment 600,000

Estimated Liability on Purchase Commitment 600,000

12/31/20x1 Impairment Loss 200,000

Inventories 200,000

Loss on purchase commitment is recognized only on guaranteed future purchases. Consequently,

"Impairment loss" and not "Loss on purchase commitment" is recognized on the 10,000 units on hand
on December 31, 20x1.

T-ACCOUNT ANALYSIS
Most accounting problems cab be solved much easier using T-account analysis than formulas. In this
section, we will solve for common accounting problems regarding inventory using T-accounts.

The beg. Balance is placed Inventory

on the DEBIT side because
“Inventory” is an asset Beg. Bal. xx COGS is placed on the CREDIT
side because the goods sold
Net Cost of
decrease the balance of inventory.
Net purchases is places on Purchases xx xx goods sold
the DEBIT side because
purchases increase the End.
balance of inventory XX Balance The End. Balance is placed on the
CREDIT side to facilitate the
“squeezing” of amounts. The sum
of the amounts of debit side must
be equal to the sum of the
amounts on the credit side.

Case 1: Ending inventory Inventory

Inventory, beg. P40,000
Net Purchases P180,000 Beg. Bal. 40,000
Cost of goods sold P200,000 Net Purchases 180,000 200,000 Cost of goods sold

How much is the Ending Inventory? 20,000 End. Balance

Case 2: Cost of goods Sold
Inventory, beg. P60,000 Inventory
Net Purchases P270,000
Inventory, end. P90,000 Beg. Bal. 60,000
Cost of goods sold
How much is the Cost of Goods Sold? Net Purchases 270,000 240,000 (squeeze)

90,000 End. Balance

Case 3: Net purchases Inventory

Inventory, beg. P40,000
Cost of goods sold P200,000 Beg. Bal. 40,000
Inventory, end. P20,000
Net Purchases
How much is the Net purchases? (squeeze) 180,000 200,000 Cost of goods sold

20,000 End. Balance

Case 4: Inventory, beginning

Net Purchases P270,000 Inventory
Cost of goods sold P240,000
Inventory, end. P90,000 Beg. Bal.
(squeeze) 60,000
How much is the Inventory, beginning?
Net Purchases 270,000 240,000 Cost of goods sold

90,000 End. Balance

Case 5: Inventory, beginning

Net Purchases P270,000 Inventory
Cost of goods sold P240,000
Inventory, end. P90,000 Beg. Bal. --

Net Purchases 270,000 240,000 Cost of goods sold

90,000 End. Balance

How much is the Total Goods Avail for sale?
CGAS/TGAS = Inventory, Beg. + Net Purch
Inventory, End + COGS
330,000 = 90,000 + 240,000

Case 6: Increase in Inventory - COGS Inventory

Net Purchases P270,000
Increase in Inv. DTY P90,000 Beg. Bal. 0
Cost of goods sold
How much is the Cost of Goods Sold? Net Purchases 270,000 180,000 (squeeze)

90,000 End. Balance

Case 6: Decrease in Inventory - COGS
Net Purchases P270,000 Inventory
Decrease in Inv. DTY P90,000
Beg. Bal. 90,000
How much is the Cost of Goods Sold? Cost of goods sold
Net Purchases 270,000 360,000 (squeeze)

0 End. Balance

Life Application:
Physical Inventory vs. Cycle Counting
A physical inventory is a comprehensive, often annual count of the stock a company has on-hand. Cycle
counting is a more systematic method of counting portions of the stock. Companies sometimes conduct cycle
counting as often as daily, and it’s advisable to perform them at least quarterly.

Physical inventory is not always automated. Cycle counting is typically automated, however. Automation
streamlines the inventory process overall, whether physical or cycle counts. It saves time, eliminates most
human error, and enables real time and useful data. The most accurate inventory counts are those that
combine cycle counts with automation.

Summary:
● Specific identification - is used for inventories that are not ordinarily interchangeable (i.e.,
inventories that are unique). Cost of sales is the cost of the specific inventory that was sold.
● FIFO – cost of sales is based on the cost of inventories that were purchased first. Consequently,
ending inventory represents the cost of the latest purchases.
● Weighted Average Cost – cost of sales is based on the average cost of all inventories purchased
during the period.
o Wtd. Ave. Cost = (TGAS in pesos ÷ TGAS in units)
● If the cost of an inventory exceeds its NRV, the inventory is written down to NRV, the lower
amount. The excess of cost over NRV represents the amount of write-down.
● The amount of reversal to be recognized should not exceed the amount of the original write-down
previously recognized.

--------------------------------------------------------Nothing follows----------------------------------------------------------------
References: INTERMEDIATE ACCTG 1A [by: Millan, Zeus Vernon B. (2021)]
https://www.iasplus.com/en/standards/ias/ias2
https://www.ifrs.org/issued-standards/list-of-standards/ias-2-inventories/
https://www.netsuite.com/portal/resource/articles/inventory-management/physical-counts-
inventory.shtml