INVENTORIES

• Inventories are assets held for sale in the ordinary resource of

business, in the process of production for each sale or in the form of
materials or supplies to be consumed in the production process or in
the rendering of service.

• Inventories also encompass finished goods product, goods in process

and materials and supplies awaiting use in the production process.
CLASSES OF INVENTORIES

Inventories are broadly classified into two

namely inventories of a trading concern and
inventories of manufacturing concern.
• 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 system.

• Manufacturing concern – is one that buys goods which are altered or

converted into another form before they are made available for sale.
INVENTORIES OF MANUFACTURING CONCERN
1. Finished goods
2. Goods in process
3. Raw materials
4. Factory or manufacturing supplies
COST OF INVENTORIES
The cost of inventories shall comprise:
Cost of purchase – The cost of purchase of inventories comprise the
purchases price, import duties and irrecoverable taxes, freight, handling
and other cost directly attributable to the acquisition of finished goods
materials and services.
Cost of conversion – The cost of conversion of inventories includes cost
directly related to the units of production such as direct labor. It also
includes a systematic allocation of fixed and variable production
overhead that is incurred in converting materials into finished goods.
Other cost – Other cost is included in the cost of inventories only to the
extent that it is incurred in bringing the inventories to their present
location and condition.
Cost that excluded from the cost of inventories and recognized as
expenses in the period when incurred:
1. Abnormal amounts of wasted materials, labors and other
production cost.
2. Storage cost unless necessary in the production process prior to a
further production stage.
3. Administrative overhead .
4. Distribution of selling costs.
COST OF INVENTORIES OF A SERVICE PROVIDER
The cost of inventories of a service provider consists primarily of the
labor and other cost of personnel directly engaged in providing the
service, including supervisory personnel and attributable over head.
 COST FORMULAS
• Fist in, First out
• Weighted Average
The standard does not permit anymore the use of the first in, first out
(FIFO) as an alternative formula in measuring cost of inventories.
• First in, First out (FIFO)

The FIFO method assumes that the goods first purchased are first sold
and consequently the goods remaining in the inventort at the end of the
period are those must recently purchased or produced.
This method favors he statement of financial position in the inventory is
stated at current replacement cost.
• Weighted average - 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.
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 out the end of
the period are those purchased or produced.
The LIFO favors the income statement because there is matching of
current cost against current revenue, the cost of good sold being
expressed in terms of current on recent cost.
SPECIFIC IDENTIFICATION
Specific identification means that specific cost are attributed to
identified items of inventory. The cost of the inventory is determined by
simply multiplying the units on hand by the actual unit cost.

MEASUREMENT OF INVENTORYT
The measurement of inventory at the lower of cost and net realizable
value in known as LCNRV.
NOT REALIZABLE VALUE
Net realizable value or NRV is the estimated selling price in the ordinary
course of business less the estimated cost of completion and the
estimated cost of diposal.
ACCOUNTING FOR INVENTORY WRITEDOWN
If the cost is lower than net realizable value, there is no accounting
problem because the inventory is stated at cost and the increase in
value is nof recognized.
If the net realizable value is lower than cost, the inventory is measured
at not realizable value.
The write down of inventory to net realizable value is accounted for
using the allowance method.
ALLOWANCE METHOD
This method is also known as loss method because a loss account "loss
on inventory writedown" is debited and a valuation account "allowance
for inventory writedown " is credited.
If the required allowance increases, an additional loss is recognized.
If the required allowance decreases, a gain on reversal of inventory
writedown is recorded.
The allowance method is used in order thatbthe effects of writedowns
and reversal of write down can be clearly identified.