INVENTORIES

INVENTORIES
ARE AS 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
RECOGNITION
 When they meet the definition of inventory
 Obtained “legal title”.
MEASUREMENT
Inventories are measured at the lower of cost and net realizable value (LCNRV).
COST
a. Purchase cost (net of trade discounts) – includes purchase price, import duties, non-
refundable taxes, transport, handling cost & other costs directly attributable to the
acquisition of inventory.
b. Conversion costs – include direct labor & production overhead costs
c. Other costs necessary in bringing the inventories to their present location and condition
NET REALIZABLE VALUE
- is the estimated selling price less the estimated cost of completion and the estimated
cost of disposal.
Goods included 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
Consignment is the act of leaving goods with someone else to sell
while retaining ownership until the goods are sold.

5. Goods in the hands of salesmen or agents

6. Goods held by customers on approval or trial
EXCLUDED FROM THE COST OF
INVENTORIES
• Abnormal amounts of wasted materials, labor or other production
costs
• Selling costs
• Administrative overheads that do not contribute to bringing
inventories to their present location and condition
• Storage costs for completed goods
ILLUSTRATION 1: TOTAL INVENTORY

ABC Co. provided the following information for the purpose of determining the amount of its
inventory as of December 31, 2021:
Goods located at the warehouse (physical count) 3,800,000
Goods located at the sales department(at cost) 13,600,000
Goods in transit purchased FOB Destination 1,600,000
Goods in transit purchased FOB Shipping point 2,100,000
Freight incurred under “freight prepaid” for the
goods purchased under FOB Shipping point 60,000
Goods held on consignment from 3D, Inc. 1,800,000

How much is the total inventory on Dec. 31, 2021?

ILLUSTRATION 2: GOODS IN TRANSIT
The balance in Page Company’s inventory account on December 31, 2021 was
P1,225,000 before the following information was considered:
 Goods shipped FOB destination, on December 20, 2021 from a vendor to
Page were lost in transit. The invoice cost of P45,000 was not recorded by
Page. On December 28, 2021, Page notified the vendor of the lost shipment.
 Goods were in transit from a vendor to Page on December 31, 2021. The
invoice cost was P60,000 and the goods were shipped FOB shipping point on
December 28, 2021. Page received the goods on January 4, 2022.
What amount of inventory should be reported in the December 31, 2021
statement of financial position?
ILLUSTRATION 3: CONSIGNED GOODS
Birlin Co. consigned goods costing P10,000 to Loyda, Inc. Transportation
costs of delivering the goods to Loyda totaled P2,000. Repair costs for
goods damaged during the transportation, P500. To induce Loyda Inc. in
accepting the consigned goods, Birlin Co. gave P1,000 representing an
advance commission. How much is the cost of the consigned goods?
 ILLUSTRATION 4:
Power Company reviewed its year-end and found the following items:
a. A package containing a product costing P81,600 was standing the shipping area when the physical
inventory was conducted. This was not included in the inventory because it was marked “Hold for
shipping instructions”. The purchase order was dated December 19 but the package was shipped and
the customer was billed January 2, 2022.
b. A special machine, fabricated to order for a particular customer, was finished and in the shipping
room on December 30, 2021. The customer was billed on that date and the machine was excluded in
the inventory. The machine costing P230,000 was shipped January 2, 2022.
c. Merchandise costing P23,500 was received on January 3, 2022 and the related purchase invoice was
recorded January 5, 2022. The invoice showed the shipment was made December 20, 2021, FOB
Destination.
d. Goods costing P150,00 were sold and delivered on December 20, 2021. The sale was accompanied
by a repurchase agreement that Power will buy back the inventory in February 2022.
How much is the inventory adjustment on December 31, 2021?
ILLUSTRATION 5: COST OF PURCHASE
Liwa Co., a VAT payer, imported goods from a foreign supplier and incurred the following
costs:
Purchase price P100,000
Import duties 10,000
Value added tax 13,000
Commission to broker 2,000
Transportation costs 5,000

Total 130,000

How much is the cost of purchase of the imported goods?