Inventories

By: Dr. Angeles A. De Guzman

Dean, College of Business Education
 Definition
• Assets which are 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
– Goods purchased and held for resale
– Finished goods produced
– Goods in process
– Materials and supplies awaiting use in the production process
– Cost of service (labor and other cost personnel directly
engaged in providing the service, including supervisory
personnel and attributable overhead
 Classes of Inventories
• Inventories of a trading concern
– Is one that buys and sell goods in the same form
purchased or merchandise inventory
• Inventories of manufacturing concern
– Finished goods
– Goods in process
– Raw materials
– Factory or manufacturing supplies
 Goods Includible in the Inventory
• All goods which the entity has title shall be
included in the inventory, regardless of
location
• “Passing of title” is a legal language which
means “the point of time at which ownership
changes”
• The legal test “Is the entity the owner of the
goods to be inventoried?
 Who is the owner of Goods in Transit

• FOB Destination, ownership of goods

purchased is transferred only upon receipt of
the goods by the buyer at the point of
destination or still property of the seller
• FOB Shipping point, ownership is transferred
upon shipment of the goods and therefore,
the goods in transit are the property of the
buyer
 Freight Terms
• Freight Collect – freight charge on the goods
shipped is not yet paid but actually paid by the
buyer
• Freight Prepaid – freight charge on the goods
shipped is already paid by the seller
 Maritime Shipping Terms
• FAS or free alongside – 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.
• CIF or Cost, Insurance and Freight – the buyer agrees
to pay in a lump sum the cost of the goods, insurance
cost and freight charge.
• Ex-ship- seller 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
 Consigned Goods
• 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
• Freight and other handling charges on goods out
on consignment are part of the cost of goods
consigned
 Statement Presentation
• Generally classified as current assets
• Presented as one line item
• Details of the inventories shall be disclosed in
the notes to the financial statements
 Accounting for Inventories
• Periodic System calls for the physical counting
of goods on hand at the end of the accounting
period to determine quantities
• Perpetual system requires the maintenance of
records called stock cards that usually offer a
running summary of the inventory inflow and
outflow
 Inventory Shortage or Overage
• 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 average
• The inventory shortage is usually closed to cost
of goods sold because this is often the result of
normal shrinkage and breakage in inventory
• Abnormal and material shortage shall be
classified and presented as other expense
Trade Discount 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, therefore not recorded.
• Cash discounts are deductions from the invoice
price when payment is made within the
discount period, therefore recorded as
purchase discount by the buyer and sales
discount by the seller
 Cost of Inventories
• Cost of purchase of inventories comprises the purchase
price, import duties and irrevocable taxes, freight,
handling and other costs directly attributable to the
acquisition of finished goods, materials and services
• 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 recent
acquisition of inventories involving a foreign currency
 Cost of Conversion
• Direct labor
• Fixed and variable production overhead
– Allocation of fixed production overhead
• The amount of fixed overhead allocated to each unit of
production is not increased as consequence of low
production or idle plant under normal capacity
– Allocation of variable production overhead
• Based on the actual use of production facilities
 Other Cost
• To the extent that it is incurred in bringing the
inventories to their present location and condition
like cost of designing product for specific customers
• Costs excluded from the cost of inventories:
– Abnormal amounts of wasted materials, labor and other
production costs
– Storage costs
– Administrative overheads
– Distribution or selling costs
Cost of Inventories of a Service Provider
• Consist primarily of the labor and other costs of
personnel directly engaged in providing the
service, including supervisory personnel and
attributable overhead
• Inventories of a service provider may be
described as work in progress
• Labor and other costs relating to sales and
general administrative personnel are not
included