INVENTORIES

W E L C O M E TO TO D AY ' S T U TO R I A L S
PA S 2
INVENTORIES
PA S 2 I N V E N TO R I E S
DEFENITION
A C C O R D I N G T O PA S 2 , I N V E N T O R I E S A R E A S S E T S . . .
1. Held for sale in the normal 2. In the process of production 3. In the form of materials or
course of the business for such sale supplies to be used in the
productions process or in the
rendering of services
(raw materials and

(finished goods) (work in process)
manufacturing supplies)
*totally different from supplies*
RECOGNITION
MEET THE DEFINITION OF INVENTORIES

THE ENTITY HAS CONTROL OVER THE
G O O D S ( H A S L E G A L LY E N F O R C E A B L E
RIGHTS OR LEGAL TITLE OVER THE
GOODS)
BUT... HOW DO WE KNOW KUNG SINO MAY “CONTROL” SA INVENTORIES

NA YAN???
O T H E R C O N S I D E R AT I O N S
regarding the transfer of control
1. GOODS IN TRANSIT
• pertain to goods already shipped by the seller but are not yet received by the buyer (otw pa lang)
• FOB Shipping Point/FOB Seller- ownership (of goods) transfers upon shipment
⚬ Ownership during transit: BUYER
• FOB Destination/FOB buyer- ownership (of goods) transfers when the goods are received
⚬ Ownership during transit: SELLER
GOODS IN TRANSIT
Important terms
FOB Shipping Point/FOB Seller FOB Destination/FOB Buyer

• Ownership (of goods) transfers when the goods
• Ownership (of goods) transfers upon shipment
are received
• Owner: BUYER
• Owner: SELLER
The owner during transit should pay for the freight
Freight Collect Freight Prepaid

• freight is not yet paid upon shipment
• the seller pays for the freight in advance before
• the carrier collects shipping cost from the buyer
shipment
upon delivery
GOODS IN TRANSIT
Illustration:
ABC Co. purchased goods with invoice price of $1,000 on account on December 27, 20x1. The
related shipping costs amounted to $10. The seller shipped the goods on December 31, 20x1.
The goods were received on January 2, 20x2 and the account was settled on January 5, 20x2.
Dates to remember:
• December 27, 20x1- The company purchased goods
• December 31, 20x1- The goods were shipped
• January 2, 20x2- The goods were received
• January 5, 20x2- The account was settled
Prepare the journal entries under the different terms of purchase.

GOODS IN TRANSIT
Illustration:
FOB Shipping point, freight collect
Dec. 31, Purchases 1,000
20x1 Accounts Payable 1,000
Jan. 2, Freight-in 10
20x2 Cash 10
Jan. 5, Accounts Payable 1,000
20x2 Cash 1,000
Purchases Cash Freight-in

1,000 1,000 10
10
1,010
GOODS IN TRANSIT
Illustration:
FOB Destination, freight prepaid
Dec. 31, 20x1
NO ENTRY
Jan. 2, 20x2 Purchases 1,000
Accounts Payable 1,000
Jan. 5, 20x2 Accounts Payable 1,000
Cash 1,000

1,000 1,000
GOODS IN TRANSIT
Illustration:
FOB Shipping point, freight prepaid
Dec. 31, Purchases 1,000
20x1 Freight-in 10
Accounts Payable 1,010
Jan. 2,
20x2 NO ENTRY
Jan. 5, Accounts Payable 1,010
20x2 Cash 1,010

1,000 1,010 10
GOODS IN TRANSIT
Illustration:
FOB Destination, freight collect
Dec. 31,
20x1 NO ENTRY
Jan. 2, Purchases 1,000
20x2 Accounts Payable 990
Cash 10
Jan. 5, Accounts Payable 990
20x2 Cash 990

1,000 990
10
1,000
2. CONSIGNED GOODS
• Pertain to goods transferred by a consignor to a consignee who will act as an agent of the
consignor in trying to sell the goods.
⚬ Consigner- True owner of the goods
⚬ Consignee- Taga-benta lang ng goods
• Ownership is not transferred
• Ownership: CONSIGNER
• Only a memo entry is normally used in recording the consignment
• Transport cost and other incidental cost are capitalized to the cost of consigned goods
• Maintenance costs are charged as expenses.
3. INVENTORY FINANCING AGREEMENTS

a. PLEDGED INVENTORY
• A borrower uses its inventory as collateral security for a loan.
• No transfer of ownership
• Ownership: DEBTOR/BORROWER
• Disclosed in the notes (na nakapledge)
 Warehouse financing
• A third party holds the inventory and acts as the creditor’s agent.
• This arrangement does not result to the transfer of control over the asset
• Ownership: DEBTOR
3. INVENTORY FINANCING AGREEMENTS

b. PRODUCT FINANCING AGREEMENT
• A seller sells inventory to a buyer but assumes an obligation to repurchase it at a later date.
• This arrangement does not result to the transfer of control over the asset.
• Ownership: SELLER
c. LOAN OF INVENTORY
• An entity borrows inventory from another entity to be replaced with the same kind of
inventory.
• This arrangement results to transfer of control over the asset.
• Ownership: BORROWER
4. SALE WITH UNUSUAL RIGHT OF RETURN

• The buyer does not recognize any inventory when:

⚬ the buyer assesses that no economic benefits will be derived from the goods (i.e. they are defective or
unsalable) or;
⚬ the buyer intends to return the goods to the seller within the time limit allowed under the sale
agreement.
5. SALE ON TRIAL (OR APPROVAL)

• A seller allows a prospective customer to use a good for a given period of time with an option to purchase
the same after the specified period.
• The legal title over the good does not pass to the prospective customer until he approves it and purchases it.
• In some arrangements, the good is considered sold if it is not returned within a reasonable period of time
after the trial period has lapsed
6. BILL AND HOLD SALES

• A contract under which an entity bills a customer for a product but the entity retains physical
possession of the product until it is transferred to the customer at a future date.
• Goods are still in the possession of the seller (hold), but the control of economic benefits already
transferred (billed)
• Ownership: BUYER
7. INSTALLMENT SALE
• An installment sale where the possession of the goods is transferred to the buyer but the seller
retains legal title solely to protect the collectability of the amount due is considered as a
regular sale.
• Ownership: BUYER
8. LAY-AWAY SALES
• A type of sale in which goods are delivered only when the buyer/purchaser makes the final
payment in a series of installments.
• However, when significant payments have already been made, the goods may be included
in the buyer’s inventory provided delivery is probable.
Illustration:
The records of ABC Co. show the following:
Goods sold on an installment basis to XYZ Inc., title to the goods is retained by
ABC Co. until full payment is made. XYZ Inc. took possession of the goods
$750,000
Goods sold to Alpha Co. for which ABC Co. has signed an agreement to
repurchase the goods sold at a set price that covers all costs related to the
inventory 680,000
Goods sold where large returns are predictable
270,000
Goods received from Beta Co. for which an agreement as signed requiring ABC
Co. to replace such goods in the near future 580,000
How much is included as part of ABC Co’s inventory?

Illustration:
The records of ABC Co. show the following:
Goods sold on an installment basis to XYZ Inc., title to the goods is retained by
ABC Co. until full payment is made. XYZ Inc. took possession of the goods
$750,000
Goods sold to Alpha Co. for which ABC Co. has signed an agreement to
repurchase the goods sold at a set price that covers all costs related to the
inventory 680,000
Goods sold where large returns are predictable
270,000
Goods received from Beta Co. for which an agreement as signed requiring ABC
Co. to replace such goods in the near future 580,000
How much is included as part of ABC Co’s inventory? $1,260,000

I N V E N TO RY S Y S T E M S
PERPETUAL INVENTORY
PERIODIC INVENTORY SYSTEM
SYSTEM
Inventory updated every time purchase and
Inventory updated only after physical count
sale are made
Increases and decreases in inventory are
All the increases and decreases are recorded recorded in the Purchases, Freight-in,
in the inventory account Purchase returns, and Purchase Discounts
accounts, as appropriate
Cost of Goods sold is debited when inventory

Cost of Goods sold is NOT recorded
is sold and credited for sales returns.
PERPETUAL INVENTORY
SYSTEM
Physical count is necessary to determine the
Physical count is performed only to check the
balances of inventory on hand and cost of
accuracy of the ledger balances.
goods sold
Requires the use of the following formula
when determining the cost of goods sold:
Beginning inventory xx
Does not require the use of any formula to Add: Net purchases xx
determine the cost of goods sold because this Total goods available for sale xx
information is readily available. Less: Ending inventory (physical count) (xx)
Cost of goods sold xx
Illustration:
Perpetual System Periodic System
1. The entity purchased goods worth $10,000 on account
Inventory $10,000 Purchases $10,000

Accounts Payable Accounts Payable
$10,000 $10,000
2. The entity paid shipping costs of $1,000 on the purchase above
Inventory 1,000 Freight-in 1,000
Cash 1,000 Cash 1,000
3. The entity returned the damaged goods worth $2,000 to its supplier
Accounts Payable 2,000 Accounts Payable 2,000
Inventory 2,000 Purchase returns 2,000
4. The entity sold goods costing $5,000 for $20,000 on account
Accounts Receivable 20,000 Accounts Receivable 20,000
Sales 20,000 Sales 20,000
Cost of goods sold 5,000
Inventory NO ENTRY
5,000
Illustration:
Perpetual System Periodic System
5. A customer returned goods with sale price of $800 and cost of $200.
Sales Returns 800 Sales Returns 800
Accounts Receivable 800 Accounts Receivable 800
Inventory 200
Cost of goods sold NO ENTRY
200
Illustration:
Solving for COGS
PERPETUAL INVENTORY
SYSTEM
During the physical count, it was revealed that the
inventory leftInventory
Beginning amounted to $4,200 $----
COGS Inventory
Purchases(1) $10,000
(4)5,000 (5)200 (1)10,000 (3)2,000
(2)1,000 (4)5,000 Freight-in (2) 1,000
(5)200 Purchase returns (3) (2,000)
Net Purchases 9,000
4,800 4,200
TGAS 9,000
Ending inventory (4,200)
COGS $4,800
MEASUREMENT
INITIALLY- COST
COST comprise the following:
• Cost of purchase/ Purchase cost includes:

o purchase price (net of trade discounts and other rebates)
 Trade discounts, rebates and similar items are deducted in determining the costs of purchase.
o import duties
o other non-recoverable taxes (not VAT)
o transport, handling and other costs directly attributable to the acquisition of finished
goods, materials and services.
• Cost of conversion- include costs incurred directly in converting raw materials into finished
goods. (Direct labor, variable production overhead, and fix production overhead)
• Other costs- only to the extent that they are incurred in bringing the inventories to their present
location and condition
MEASUREMENT
INITIALLY- COST
Excludes: SASA
• Storage costs- immediately expense unless it is necessary in the production process before a
further production stage (kasama sa steps in production=capitalize)
• Abnormal amounts of wasted materials, labor or other production costs (normal=capitalize)
• Selling costs
• Administrative overheads- that do not contribute to the bringing the inventories to their present
location and condition
COST FORMULAS
cost of goods sold
Specific identification
• use when inventories are not ordinarily interchangeable -Unique sa bawat isa
• Costs are assigned separately for specific projects
• Cost of sales represents the actual cost of the specific items sold
• Ending inventory represents the actual cost of the specific items on hand
First-in, Firs-out (FIFO)
• use when inventories are ordinarily interchangeable
• Inventories that are purchased first are sold first
Weighted average
• use when inventories are ordinarily interchangeable
• Cost of each item is determined from the average cost of similar items (based on the weighted average of the
beginning inventory and all other purchases during the period)
COST FORMULAS
cost of goods sold
Specific identification
1. Product ABC-123 costing $10,984.67 is sold
COGS= $10,984.67
2. Product ABC-123 costing $10,984.67 remains unsold
Ending inventory= $10,984.67

COST FORMULAS
cost of goods sold
Illustration:
The following information was available from the inventory records of Thamuz Company
for January:
Units Unit Cost Total Cost
Balance, January 1 3,000 P9.77 P29,310
Purchase, January 6 2,000 10.30 20,600
Sales, January 7 2,500

Purchase, January 26 2,700 10.71 28,917
Sales, January 31 4,000
Balance, January 31 1,200

COST FORMULAS
cost of goods sold
First-in, Firs-out (FIFO)
Cost of goods sold: (6,500 units)
From beg. Inventory (3,000 x 9.77) P29,310
From Jan. 6 purchase (2,000 x 10.30) 20,600
From Jan. 26 purchase (1,500 x 10.71) 16,065
Total COGS P65,975
Ending inventory: (1,200 units)

Inventory, 1/31 (1,200 x 10.71) P12,852
COST FORMULAS
cost of goods sold
Weighted average
Average cost:
Beginning inventory (3,000 x 9.77) P29,310
Purchase, 1/6 (2,000 x 10.30) 20,600
Purchase, 1/26 (2,700 x 10.71) 28,917
Total P78,827
Total units of inventory 7,700
Average cost per unit P10.24
Cost of goods sold (6,500 x 10.24) P66,560

Ending inventory (1,200 x 10.24) P12,267
MEASUREMENT
SUBSEQUENTLY- LOWER OF COST OR NET REALIZABLE

Net Realizable Value:

VALUE
• Estimated selling price less the estimated costs to complete the estimated costs to sell (estimated
because we are looking for future amounts)
• Based on the most reliable evidence available at the time the estimates are made
NOTES:
• Inventories are not impaired not subject to PAS 36 (bc measuring it at lower of cost or net
realizable value is already impairment)
• NRV: Entity/seller based
• Fair value: Market based
MEASUREMENT
Write-down to NRV
• In cases where NRV<Cost; the inventories may need to be written down to their net
realizable value.
• The excess of cost over NRV represents the amount of write-down. If the cost of an
inventory is lower than its NRV (NRV>Cost), no write-down is necessary.
• Write-downs of inventories to NRV are normally charged to cost of goods sold in the period
of write-down. However, write-downs due to abnormal losses are charged to loss.
MEASUREMENT
Illustration:
Lunox Enterprises Inc. is a retailer of Italian furniture and has five major product lines: sofas,
dining tables, beds, closets, and lounge chairs. At December 31, 2019, quantity on hand, cost per
unit, and net realizable value (NRV) per unit of the product lines are as follows:
Product line Quantity Cost per unit NRV per unit
Sofas 100 P50,000 P51,000
Dining tables 200 25,000 22,500
Beds 300 75,000 80,000
Closets 400 37,500 38,000
Lounge chairs 500 12,500 10,000
Compute the valuation of the inventory at December 31, 2019.

MEASUREMENT
Illustration:
Compute the valuation of the inventory at December 31, 2019.
Product line LCNRV Write down
Sofas (100 x 50,000) P5,000,000
Dining tables (200 x 22,500)4,500,000 P500,000
Beds (300 x 75,000) 22,500,000
Closets (400 x 37,500) 15,000,000
Lounge chairs (500 x 10,000) 5,000,000 1,250,000
Total P52,000,000 P1,750,000
Cost of goods sold 1,750,000

Inventory 1,750,000
To record write-down of inventory to NRV.
MEASUREMENT
Reversal of Write-downs
• When there is clear evidence of an increase in NRV which was previously written down
below cost, the amount of write-down is reverted in profit or loss in the period of such
reversal so that the new carrying amount is the lower of the cost and the revised NRV.
• However, the amount of reversal to be recognized should not exceed the amount of the
original write-down previously recognized.
MEASUREMENT
Illustration:
ABC Co. has the following comparative information regarding its inventories.
20x1 20x2
Cost 240,000 300,000
NRV 220,000 330,000
COGS before adjustments 2,000,000 1,800,000
Requirement: Provide journal entries in 20x1 and 20x2

MEASUREMENT
Illustration:
20x1 20x2
Cost 240,000 300,000
NRV 220,000 330,000
COGS before adjustments 2,000,000 1,800,000
Dec. 31, Cost of goods sold (240k-220k) 20,000

20x1 Inventory 20,000
Dec. 31, Inventory 20,000
20x2 Cost of goods sold 20,000
GETS BA,
FRENS? HEHE
Questions and clarification are very much welcome!!! :>
PRACTICE PROBLEM 1
The inventory records of Lafayette’s Guns and Ships on December 31, 20x1 shows a balance of $260,000. The following
information was also gathered:
a. Goods costing $10,000, purchased under FOB shipping point, were not included in the ledger balance because these were
still in transit as of December 31, 20x1. The supplier shipped the goods on December 30, 20x1 and prepaid the freight of
$1,000.
b. Goods costing $5,000 were received on December 31, 20x1. These were recorded on January 3, 20x2.
c. Goods costing $16,000 were shipped to a customer on December 31, 20x1 on an FOB shipping point term. The goods were
included in the ledger balance because the customer received the shipment only on January 4, 20x2.
d. Goods costing $20,000 were shipped to a customer on December 31, 20x1 on an FOB Destination term. The goods were not
included in the balance because the goods were already dispatched when the inventories were counted at 11pm on December
31, 20x1.
How much is the correct inventory of Lafayette’s Guns and Ships on December 31, 20x1?
PRACTICE PROBLEM 1
SOLUTION:
Unadjusted Inventory $260,000
Purchased goods in transit under FOB Shipping point and 11,000
freight-in
(10k+1k)
Unrecorded goods 5,000

Goods in transit sold through FOB shipping point (16,000)
Goods in transit sold through FOB destination 20,000
$280,000
PRACTICE PROBLEM 2
Information on Hercules Mulligan’s Hot Pants Co.’s inventories is shown below:

20x1 20x2
Cost 600,000 900,000
NRV 400,000 650,000
How much is the reversal of write-down to be recognized?

PRACTICE PROBLEM 2
Information on Hercules Mulligan’s Hot Pants Co.’s inventories is shown below:

20x1 20x2
Cost 600,000 900,000
NRV 400,000 650,000
How much is the reversal of write-down to be recognized?
20x1 Cost of goods sold (600k-400k) 200,000

Inventory 200,000
20x2 Inventory 20o,000
PRACTICE PROBLEM 3
Beg. Inventory $20,000

Purchases 41,000
Purchase returns and allowances 3,000
Purchase discounts 4,000
Goods available for sale 55,000

How much is the freight-in?

PRACTICE PROBLEM 3
SOLUTION:
Goods available for sale $55,000
Less: Beg. Inventory (20,000)
Net purchases $35,000
Add: Purchase returns and allowances 3,000
Less: Gross purchases 41,000
Freight-in $1,000
PRACTICE PROBLEM 4
Beg. Inventory $20,000

Purchases 41,000
Freight in 1,000
Purchase returns and allowances 3,000
Goods available for sale 55,000
How much is the ending inventory?

PRACTICE PROBLEM 4
SOLUTION:
Goods available for sale $55,000
Cost of goods sold (22,000)
Ending Inventory $33,000
THANK YOU! :>
TOPICS &
EXAMPLES
ADDITIONAL
COST FORMULAS-ADDITIONAL CONCEPTS
cost of goods sold
Illustration:
Date Transaction Units Unit cost Total cost

1-Aug. Inventory 2,000 $36.00 72,000
7 Purchase 3,000 37.20 111,600
12 Sales 4,200
13 Sales return 600
21 Purchase 4,800 38.00 182,400
22 Sales 3,800
29 Purchase 1,900 38.60 73,340
30 Purchase Return 300 38.60 (11,580)
Total goods available for sale $427,760
cost of goods sold
Illustration: FIFO periodic
Beg. Inventory in units 2,000 TGAS in pesos 427,760
Net purchases in units 9,400

Ending inventory at cost (152,960)
TGAS in units 11,400
Cost of goods sold $274,800
Quantity of goods sold (7,400)
Ending inventory in units 4,000
Units Unit cost Total cost

Net purchases form Aug. 29 (1,600) 38.60 $61,760
2,400
Purchases from Aug. 21 (2,400) 38.00 91,200
Ending inventory at cost $152,960
cost of goods sold
Illustration: FIFO perpetual
1-Aug. Inventory 2,000 $36.00 72,000

7 Purchase 3,000 37.20 111,600
12 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 Purchase 4,800 38.00 182,400
22 Sales (3,800)
Allocation:
29 Net Purchase 1,600 38.60 61,760
Ending inventory at cost $152,960
COGS= (72,000+59,520+52,080+91,200)=274,800
cost of goods sold
Simple Weighted average - periodic

The weighted average cost is determined at the end of the period by using the following
formula:
cost of goods sold
Illustration: Simple Weighted average - periodic
WAC= TGAS in pesos

TGAS in units Ending Inventory in units 4,000
= 427,760 Multiplied by: WAC 37.52
11,400
Ending Inventory at cost 150,080
= $37.52
Beg. Inventory in units 2,000 TGAS at cost 427,760

Net purchases in units 9,400 Ending Inventory at cost (150,080)
TGAS in units 11,400 Cost of goods sold 277,680
Quantity of goods sold (7,400)

cost of goods sold
Moving average- Perpetual

• A new or moving weighted average cost is determined after every purchase or as
each shipment is received by dividing total goods available for sale as of that date by
the total quantity of goods available for sale as of that date.
• The moving average unit cost is then multiplied by the quantity of goods sold after
the latest purchase to determine cost of goods sold or by the quantity of inventory on
hand to determine ending inventory.
cost of goods sold
Illustration: Moving average- Perpetual
1-Aug. Inventory 2,000 $36.00 72,000

7 Purchase 3,000 37.20 111,600
Moving ave. unit cost (183,600/5,000) 5,000 36.72 183,600
12 Sales (4,200) 36.72 (154,224)
13 Sales return 600 36.72 22,032

21 Purchase 4,800 38.00 182,400
Moving ave. unit cost (233,808/6,200) 6,200 37,71 233,808
22 Sales (3,800) 37,71 (143,298)
29 Purchase 1,900 38.60 73,340

30 Purchase Return (300) 38.60 (11,580)
Ending inventory 4,000 $152,270
COGS=(154,224-22,032+143,298)= $275,490
DISCOUNTS
Trade Discounts Cash Discounts

• Given to encourage prompt payment.
• Given to encourage orders in large quantities.
• They are deducted from invoice price in order
• Do not form part of the cost of inventory; they
to determine the amount of net payment
are directly deducted from the list price.
required within the discount period.
• They are not recorded in the books of buyer
• Accounted through either net method or gross
nor seller.
method.
DISCOUNTS
Gross Method
• The cost of inventory and accounts payable are recorded gross of cash discounts.
• Purchase discounts are recorded under the “Purchase discounts” account only when taken.
• Purchase discount is deducted from gross purchases when computing for net purchases.
Net Method
• The cost of inventory and accounts payable are recorded net of cash discounts, regardless
of whether such discounts are taken or not.
• Purchase discounts not taken are recorded under the “Purchase discounts lost” account
and included as part of “other expenses” or as “finance cost” (interest expense).
DISCOUNTS
Illustration:
An entity purchases inventory with a list price of $10,000 on account under credit terms of 20%, 10%, 2/10, n/30.
Gross Method Net Method

1. Purchase of inventory
Purchases 7,200 Purchases 7,056
Accounts Payable 7,200 Accounts Payable 7,056
(10,000x80%x90%) (10,000x80%x90%X98%)
Trade discounts are deducted from the list price to Trade discounts and cash discounts are deducted from
determine the invoice price gross of cash discounts the list price to determine the invoice price net of cash
discounts
2. Assume payment is made within discount period
Accounts payable 7,200 Accounts payable 7,056
Purchase discount 144 Cash 7,056
Cash 7,056
3. Assume payment is made beyond discount period
Accounts payable 7,200 Accounts payable 7,056
Cash 7,200 Purchase discount lost 144
Cash 7,200
RECOGNIZING INVENTORIES
1
Barats Company reported P5,000,000 of inventory on December 31, 2019, based on physical count. Additional information is
as follows:
a. Goods sold to a customer on December 31, 2019 which are being held for the customer to call at the customer's
convenience with a cost of P150,000 and included in the count.
b. Excluded from the physical count were goods billed to a customer, FOB shipping point, on December 31, 2019. The
goods had a cost of P200,000 and had been billed at P350,000. The shipment is ready for pick-up by the delivery
contractor on January 15, 2020.
c. Goods were in transit from a vendor. The invoice cost was P300,000 and goods were shipped FOB seller on
December 31, 2019.
d. Work in process costing P400,000 was sent to an outside processor for finishing on December 31, 2019.
e. Goods out on consignment with sales price of P1,000,000 and markup of 25% on cost. Shipping costs amounted to
P50,000.
What is the correct amount of inventory on December 31, 2019?
RECOGNIZING INVENTORIES
1
What is the correct amount of inventory on December 31, 2019?
Unadjusted amount of inventory P5,000,000
a. Goods held for the customer (150,000)
b. Goods shipped to a customer,
FOB shipping point 200,000
c. Goods purchased, FOB seller 300,000
d. WIP sent outside for finishing 400,000
e. Consigned goods 850,000
Adjusted inventory, 12/31/19 P6,600,000

RECOGNIZING INVENTORIES 2
On December 31, 2020, Cyclops Company has a balance of P240,000 in its inventory account determined through physical count and a
balance of P90,000 in its accounts payable account.
The balances were determined before any necessary adjustment for the following:
a. Segregated goods in the shipping area marked “Bill and hold sale” were included in inventory because shipment was not made until
January 4, 2021. The goods were sold to the customer on a “bill and hold” sale for P20,000. The cost of the goods is P10,000. The goods
were already packed and ready for shipment. Both ABC and the buyer acknowledged the shipping term.
b. A package containing a product costing P80,000 was standing in the shipping area when the physical inventory was conducted. This was
included in the inventory although it was marked “Hold for shipping instructions.” The sale order was dated December 17 but the package
was shipped and the customer was billed on January 4, 2021.
c. Merchandise costing P10,000, shipped FOB destination from a vendor on December 30, 2020, was received and recorded on January 5,
2021.
d. Goods shipped F.O.B. shipping point on December 27, 2020, from a vendor were received on January 6, 2021. The invoice cost of
P30,000 was recorded on December 31, 2020 and included in the count as “goods in-transit.”
RECOGNIZING INVENTORIES 2
What is the adjusted inventory?

Unadjusted amount of inventory P240,000
a. Bill and hold sales (10,000)
b. Bill and hold sale s (billed on jan 4.)
c. Goods purchased, FOB Buyer
d. Goods in transit, FOB Seller
Adjusted inventory, 12/31/20 P230,000

WRITE-DOWN
ABC Co. buys and sells product A & B. The following unit costs are available for the inventory as December
31, 20x1: (All costs are borne by ABC Co.)
Product A Product B
Number of units 2,000 3,000

Purchase cost per unit $100 $200
Delivery cost from supplier 20 30
Estimated selling price 150 250
Selling costs 22 40
General administrative 15 18
Requirements:
Determine the amount of write-down. Provide the adjusting entry.
Compute for the valuation of the inventories in ABC’s December 31, 20x1 statement of financial position.
WRITE-DOWN SOLUTION
a. Product A Product B
Cost:
Purchase cost per unit $100 $200
Delivery cost from supplier 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
(cost) (NRV)
Dec. 31, 20x1 Cost of goods sold (230-210x3,000 units) 60,000

Inventory
60,000
WRITE-DOWN SOLUTION
b.
Product A Product B
Lower of cost and NRV 120 210
Multiplied by: Number of units 2,000 3,000
Inventory, Dec. 31, 20x1 240,000 630,000

INVENTORIES

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INVENTORIES

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W E L C O M E TO TO D AY ' S T U TO R I A L S

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MEET THE DEFINITION OF INVENTORIES

BUT... HOW DO WE KNOW KUNG SINO MAY “CONTROL” SA INVENTORIES

FOB Shipping Point/FOB Seller FOB Destination/FOB Buyer

• Ownership (of goods) transfers when the goods

The owner during transit should pay for the freight

Freight Collect Freight Prepaid

Prepare the journal entries under the different terms of purchase.

Dec. 31, Purchases 1,000

Purchases Cash Freight-in

Dec. 31, 20x1

Purchases Cash Freight-in

Dec. 31, Purchases 1,000

Purchases Cash Freight-in

Purchases Cash Freight-in

3. INVENTORY FINANCING AGREEMENTS

3. INVENTORY FINANCING AGREEMENTS

b. PRODUCT FINANCING AGREEMENT

4. SALE WITH UNUSUAL RIGHT OF RETURN

• The buyer does not recognize any inventory when:

5. SALE ON TRIAL (OR APPROVAL)

6. BILL AND HOLD SALES

How much is included as part of ABC Co’s inventory?

How much is included as part of ABC Co’s inventory? $1,260,000

Inventory updated every time purchase and

Cost of Goods sold is debited when inventory

Physical count is necessary to determine the

Inventory $10,000 Purchases $10,000

Perpetual System Periodic System

• Cost of purchase/ Purchase cost includes:

• Costs are assigned separately for specific projects

1. Product ABC-123 costing $10,984.67 is sold

2. Product ABC-123 costing $10,984.67 remains unsold

Ending inventory= $10,984.67

Units Unit Cost Total Cost

Sales, January 7 2,500

Balance, January 31 1,200

Cost of goods sold: (6,500 units)

Ending inventory: (1,200 units)

Cost of goods sold (6,500 x 10.24) P66,560

SUBSEQUENTLY- LOWER OF COST OR NET REALIZABLE

Net Realizable Value:

Compute the valuation of the inventory at December 31, 2019.

Product line LCNRV Write down

Cost of goods sold 1,750,000

NRV 220,000 330,000

COGS before adjustments 2,000,000 1,800,000

Requirement: Provide journal entries in 20x1 and 20x2

Cost 240,000 300,000

COGS before adjustments 2,000,000 1,800,000

Dec. 31, Cost of goods sold (240k-220k) 20,000

Purchased goods in transit under FOB Shipping point and 11,000

Unrecorded goods 5,000

Goods in transit sold through FOB destination 20,000

Information on Hercules Mulligan’s Hot Pants Co.’s inventories is shown below:

How much is the reversal of write-down to be recognized?

Information on Hercules Mulligan’s Hot Pants Co.’s inventories is shown below:

How much is the reversal of write-down to be recognized?

20x1 Cost of goods sold (600k-400k) 200,000

Beg. Inventory $20,000

Purchase returns and allowances 3,000

Goods available for sale 55,000

How much is the freight-in?