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Accounting for Inventories
Accounting
Course
Bachelor of Science in Accountancy (ACTG 21A)
278 Documents
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Cavite State University
Academic year: 2022/2023
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Accounting for INVENTORIES ODM
DEFINITIONS (Excerpts from IAS 2)
INVENTORIES are 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.
NET REALIZABLE VALUE 1 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.
BROKER-TRADERS 2 are those who buy or sell commodities for others or on their own
account.
GENERAL RULE FOR RECOGNITION, MEASUREMENT, AND DISCLOSURE
The item, to be recognized as inventory, shall be for sale in the ordinary course of business, still in the process of
production, or the item is a raw material or part of supplies to be used in such production. It is important to note that
the entity has the ownership over the items of inventory, and it should be probable that the company’s investment on
it is recoverable through using it in production or through sale of such item.
Inventories shall be measured at the lower of cost 3 and net realizable value.
Inventories are presented on the face of the balance sheet under current assets.
OWNERSHIP OVER THE GOODS AND FREIGHT TERMS
As a general rule, the owner should be the one to shoulder the freight charges on the delivery of goods.
FREIGHT TERM DESCRIPTION
FOB SHIPPING POINT
The ownership over the goods is vested to the buyer upon shipment so the buyer will be the one
to shoulder the freight cost.
FOB DESTINATION
The ownership over the goods is vested to the buyer upon reaching its destination so the seller
will be the one to shoulder the freight cost.
FREIGHT PREPAID Seller will pay the freight.
FREIGHT COLLECT Buyer will pay the freight.
CIF (Cost, Insurance, & Freight) The ownership will be transferred to the buyer upon delivery of the goods to the carrier.
FAS (Free alongside) The ownership will be transferred to the buyer when the carrier takes possession of the goods.
SPECIAL ITEMS FOR YEAR-END INVENTORY OWNERSHIP
CASE WHO IS THE OWNER OF THE GOODS?
GOODS STILL IN TRANSIT FOB SHIPPING POINT: Buyer FOB DESTINATION: Seller
CONSIGNMENT SALES 4 Consignor
SALE FOR APPROVAL Seller
SALE WITH A BUYBACK AGREEMENT Seller
BILL AND HOLD SALE AGREEMENT Buyer
INSTALLMENT SALES Buyer
LAYAWAY SALE AGREEMENT Seller
1 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.
2 Commodity broker-traders measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair
value less costs to sell are recognized in profit or loss in the period of the change. The inventories referred to are principally acquired with the purpose of selling in the
near future and generating a profit from fluctuations in price or broker-traders’ margin.
3 The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and
condition. The costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity
from the taxing authorities), and transport, 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 costs of purchase. The costs of conversion of inventories include costs directly related to the units of
production, such as direct labor. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into
finished goods. Repossessed merchandise and trade ins are valued at estimated selling price less recondition cost, selling cost, and normal profit margin.
Agriculture Inventories comprising agricultural produce that an entity has harvested from its biological assets are measured on initial recognition at their fair value
less costs to sell at the point of harvest. This is the cost of the inventories at that date. Examples of costs excluded from the cost of inventories and recognized as
expenses in the period in which they are incurred are:
(a) abnormal amounts of wasted materials, labor or other production costs; (b) storage costs, unless those costs are necessary in the production process before a
further production stage; (c) administrative overheads that do not contribute to bringing inventories to their present location and condition; and (d) selling costs.
4 Under consignment, freight and other handling costs are part of the cost of the inventory (but expensed if goods are returned to the consignor).
ACCOUNTING SYTEMS FOR INVENTORIES
PERIODIC SYSTEM PERPETUAL SYSTEM
During the year:
Purchases xxx
Accounts payable xxx
<- Upon purchase ->
Inventories xxx
Accounts payable xxx
Freight In xxx
Cash** xxx
<- Upon incurrence of
transportation costs ->
Inventories xxx
Cash** xxx
Accounts payable xxx
(Purchase discount xxx)
Cash xxx
<- Upon payment ->
(Additional credit in entry if payment is within the discount period)
Accounts payable xxx
(Inventories xxx)
Cash xxx
Accounts payable* xxx
Purchase returns xxx
<- Upon return to supplier ->
Accounts payable* xxx
Inventories xxx
Accounts receivable xxx
Sales xxx
<- Upon sale ->
Accounts receivable xxx
Sales xxx
Cost of goods sold xxx
Inventories xxx
Cash xxx
(Sales discounts xxx)
Accounts receivable xxx
<- Upon collection ->
(Additional debit in entry if collection is within the discount period)
Cash xxx
(Sales discounts xxx)
Accounts receivable xxx
Sales returns xxx
Accounts receivable* xxx
<-Upon return by customer->
Sales returns xxx
Accounts receivable* xxx
Inventories xxx
Cost of goods sold xxx
At year-end:
Cost of Goods Sold xxx
Inventory (beginning amount) xxx
####### To close the beginning inventory***
Inventory (ending amount) xxx
Cost of Goods Sold xxx
####### To establish the ending inventory***
Cost of Goods Sold xxx
Purchase returns xxx
Purchase discounts xxx
Purchases xxx
Freight in xxx
####### To close the related net purchase accounts***
<- Required adjustment -> None
Analysis:
Yes <- Requires physical count -> Optional
(Short/over; If normal-COGS, If not normal-OPEX)
Large <- Volume of inventories -> Small
Low <- Price of inventories -> High
Fast <- Turnover of inventories -> Slow
No <- Uses stock cards -> Yes
No <- Uses moving average -> Yes
Inferior
<-Internal control
effectiveness->
Superior
####### COGS – Cost of Goods Sold
####### OPEX – Operating Expense
####### *Record the effect (increase or decrease) in “Cash” account if there is a refund (received or given) upon return.
####### ** Record the effect as addition to “Accounts Payable” account if the transportation is arranged to be on account.
####### **All adjustments are being done to come up with the amount of cost of goods sold to be reported in the income statement.
TYPES OF DISCOUNTS
TRADE DISCOUNTS
Given to encourage trading or promote sales.
Deducted to list or catalog price (to get invoice price).
Not recorded
CASH DISCOUNTS
Given to encourage prompt payment.
Deducted to invoice price (to get the amount to be paid within the discount period)
Recorded as buyer’s “purchase discount” or seller’s “sales discount”.
INVENTORY ESTIMATION
Retail method approaches:
COST RATIO COMPUTATION
Conservative (Lower of cost or market) Considers net mark up only
Average cost Considers both net mark up and net mark down
FIFO retail
Considers both net mark up and net mark down but not beginning inventory
(Current year cost ratio)
DISCLOSURES IN THE NOTES TO FINANCIAL STATEMENTS
- Accounting policy for
####### o cost measurement (cost flow)
####### o accounting system
- Carrying amount
####### o in total
####### o per class
####### o that is carried at net realizable value
####### o of pledged as security
- Amount of write-down and reversal “ G o o d m e r c h a n d i s e , e v en h i d d e n , s o o n f i n d s b u y e r s. ” - P l a u t u s
GROSS
PROFIT
METHOD
TGAS
Less: COGS
Inventory, end
####### GPR – Gross Profit Ratio
RETAIL
INVENTORY
METHOD
TGAS @ Selling price
Less: Net sales
Inventory, end @ Selling price
Multiply by: Cost Ratio
Inventory, end @ cost
Net sales less Gross profit
If GPR is based on sales: Net sales × Cost ratio
If GPR is based on cost: Net sales ÷ Sales ratio
𝑻𝑮𝑨𝑺 @ 𝑪𝒐𝒔𝒕
𝑻𝑮𝑨𝑺 @ 𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝒑𝒓𝒊𝒄𝒆
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Accounting for Inventories
Course: Bachelor of Science in Accountancy (ACTG 21A)
278 Documents
Students shared 278 documents in this course
University: Cavite State University
Was this document helpful?
Accounting for INVENTORIES Page 1 of 4
Accounting for INVENTORIES ODM
DEFINITIONS (Excerpts from IAS 2)
INVENTORIES
are 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.
NET REALIZABLE VALUE1
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.
BROKER-TRADERS2
are those who buy or sell commodities for others or on their own
account.
GENERAL RULE FOR RECOGNITION, MEASUREMENT, AND DISCLOSURE
The item, to be recognized as inventory, shall be for sale in the ordinary course of business, still in the process of
production, or the item is a raw material or part of supplies to be used in such production. It is important to note that
the entity has the ownership over the items of inventory, and it should be probable that the company’s investment on
it is recoverable through using it in production or through sale of such item.
Inventories shall be measured at the lower of cost3 and net realizable value.
Inventories are presented on the face of the balance sheet under current assets.
OWNERSHIP OVER THE GOODS AND FREIGHT TERMS
As a general rule, the owner should be the one to shoulder the freight charges on the delivery of goods.
FREIGHT TERM
DESCRIPTION
FOB SHIPPING POINT
The ownership over the goods is vested to the buyer upon shipment so the buyer will be the one
to shoulder the freight cost.
FOB DESTINATION
The ownership over the goods is vested to the buyer upon reaching its destination so the seller
will be the one to shoulder the freight cost.
FREIGHT PREPAID
Seller will pay the freight.
FREIGHT COLLECT
Buyer will pay the freight.
CIF (Cost, Insurance, & Freight)
The ownership will be transferred to the buyer upon delivery of the goods to the carrier.
FAS (Free alongside)
The ownership will be transferred to the buyer when the carrier takes possession of the goods.
SPECIAL ITEMS FOR YEAR-END INVENTORY OWNERSHIP
CASE
WHO IS THE OWNER OF THE GOODS?
GOODS STILL IN TRANSIT
FOB SHIPPING POINT: Buyer
FOB DESTINATION: Seller
CONSIGNMENT SALES4
Consignor
SALE FOR APPROVAL
Seller
SALE WITH A BUYBACK AGREEMENT
Seller
BILL AND HOLD SALE AGREEMENT
Buyer
INSTALLMENT SALES
Buyer
LAYAWAY SALE AGREEMENT
Seller
1 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.
2 Commodity broker-traders measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair
value less costs to sell are recognized in profit or loss in the period of the change. The inventories referred to are principally acquired with the purpose of selling in the
near future and generating a profit from fluctuations in price or broker-traders’ margin.
3 The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and
condition. The costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity
from the taxing authorities), and transport, 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 costs of purchase. The costs of conversion of inventories include costs directly related to the units of
production, such as direct labor. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into
finished goods. Repossessed merchandise and trade ins are valued at estimated selling price less recondition cost, selling cost, and normal profit margin.
Agriculture Inventories comprising agricultural produce that an entity has harvested from its biological assets are measured on initial recognition at their fair value
less costs to sell at the point of harvest. This is the cost of the inventories at that date. Examples of costs excluded from the cost of inventories and recognized as
expenses in the period in which they are incurred are:
(a) abnormal amounts of wasted materials, labor or other production costs; (b) storage costs, unless those costs are necessary in the production process before a
further production stage; (c) administrative overheads that do not contribute to bringing inventories to their present location and condition; and (d) selling costs.
4 Under consignment, freight and other handling costs are part of the cost of the inventory (but expensed if goods are returned to the consignor).
