Inventories are as assets:
Held for sale in the ordinary course of business (finished goods)
In the process of production for such sale (work in process), or
In the form of materials or supplies to be consumed in the production process or in the rendering of services
(raw materials and manufacturing supplies).
Items included in the ending balance of the inventories: (BLISSGC)
1. Goods in transit
Pertain to goods already shipped by the seller but are not yet received by the buyer.
Transaction Terms Included/ Excluded in the Inventories
Sale FOB Destination Included
Sale FOB Shipping Point Excluded
Purchase FOB Destination Excluded
Purchase FOB Shipping Point Included
2. Consigned goods
Involves a consignor transferring goods to a consignee who acts as agent of the consignor in selling the
goods.
Consigned goods are included in the consignor’s inventory and are excluded from the consignee’s
inventory.
3. Inventory financing agreement
Inventories may be acquired or sold under various forms of financing agreements which may include the
following:
a. Product financing agreement
b. Pledge of inventory
c. Loan on inventory
Goods sold under a product financing agreement whereby the seller is obligated to repurchase the goods
sold at a future date is not considered sale. Therefore, the goods are included in the seller’s inventory.
4. Sale with unusual right of return
The buyer normally recognizes goods purchased under a sale with a right of return at the time of sale,
unless the goods purchased does not qualify for recognition of asset.
The buyer does not recognize any inventory when
a. The buyer assesses that no economic benefits will be derived from the goods, such as when they
are defective or unsalable.
b. The buyer intends to return the goods to the seller within the time limit allowed under the sale
agreement.
5. Sale on trial or sale on approval
A seller allows a prospective customer to use a good for a given period of time.
At the end of that time, if the prospective customer is satisfied with the goods, he purchases it. If not, he
returns it to the seller.
Under this type of arrangement, the legal title over the good does not pass to the prospective customer
until he approves it and purchases it.
Therefore, the goods remain in the seller’s inventory during the trial period.
The prospective customer does not include the goods in his inventory until he purchases it.
6. Installment Sale
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.
Therefore, the goods are excluded from the seller’s inventory and included in the buyer’s inventory at
the point of sale.
7. Bill and hold sale
A contract (of sale) under which a seller bills a customer but retains physical possession of the goods
until it is transferred to the customer at a future date.
The goods are excluded from the seller’s inventory and included in the buyer’s inventory upon
billing.
8. Lay away sale
Type of sale in which goods are delivered only when the buyer makes the final payment in a series of
installments.
The goods sold are included in the seller’s inventory until the goods are delivered to the buyer.
Type of Arrangement Included in the inventory of
FOB Shipping Point Buyer
FOB Destination Seller
Consigned goods Consignor
Inventory financing Borrower
Sale with unusual right of return Buyer except when unsalable
Sale on trial Seller
Bill and hold Buyer
Lay away Seller
INVENTORY METHODS AND COSTING (SFW)
Perpetual Inventory System
“Inventory” account is updated each time a purchase or sale is made.
The “Inventory” account shows a continuing or running balance of goods on hand.
Records called “stock cards” and “stock ledger cards” are maintained under this system.
Physical count is performed only as an internal control to determine the accuracy of the balance per
records.
Journal Entries:
1. Purchase of goods.
Inventory xxx
Accounts Payable xxx
2. Paid shipping cost.
Inventory xxx
Cash xxx
3. Returned damage goods
Accounts Payable xxx
Inventory xxx
4. Sale of goods
Accounts receivable xxx
Sales xxx
Cost of goods sold xxx
Inventory xxx
Periodic Inventory System
“Inventory” account is updated only when a physical count is performed.
The amounts of inventory and cost of goods sold are determined only periodically.
Under this system, the entity does not maintain records that show the running balances of inventory on
hand and cost of goods sold as at any given point of time.
Physical count of the quantity of goods on hand must be performed periodically (daily, weekly,
monthly).
The quantity counted is then multiplied by the unit cost to get the balance of the “Inventory” account.
Cost of goods sold:
Beginning inventory Pxx
Add: Net purchases xxx
TGAS xxx
Less: Ending Invty. (physical count) (xx)
COGS Pxx
Journal Entries:
1. Purchase of goods.
Purchases xxx
Accounts Payable xxx
2. Paid shipping cost.
Freight-in xxx
Cash xxx
3. Returned damage goods
Accounts Payable xxx
Purchase Returns xxx
4. Sale of goods
Accounts receivable xxx
Sales xxx
No Entry
Specific Identification
Used for inventories that are not ordinarily interchangeable (those that are individually unique) and those
that are segregated for specific projects.
Specific costs are attributed to identified items of inventory.
Cost of sales represents the actual cost of the specific items sold while ending inventory represents the
actual cost of the specific items on hand.
If an inventory costing P10,000 is sold, the amount charged to cost of sales is also P10,000.
If inventory remains unsold, the amount included in ending inventory is also P10,000.
Specific identification is not appropriate when inventory consist of large number of items that are
ordinarily interchangeable.
First-In, First-Out (FIFO)
It is assumed that inventories that were purchased or produced first are sold first.
Unsold inventories at the end of the period are those most recently purchased or produced.
Cost of sales represents costs from earlier purchases while the cost of ending inventory represents cost
from the most recent purchases.
Weighted Average
Cost of sales and ending inventory are determined based on the weighted average cost of beginning
inventory and all inventories purchased or produced during the period.
The average may be calculated on a periodic basis, or as each additional purchase is made depending
upon the circumstances of the entity.
Formula:
Weighted Average Cost= TGAS in pesos / TGAS in units
INVENTORY ESTIMATION (GP-R)
Gross Profit method
Can be used to estimate ending inventory and cost of goods sold when a physical count is not possible.
It is used to evaluate the reasonableness of a given inventory amount and in reconstructing financial
records.
Use to estimate inventories for interim reporting purposes but is generally not acceptable for annual
financing reporting.
Under this method gross profit is assumed to be relatively constant from period to period.
Gross profit is used to compute for the gross profit rate (GPR) which will in turn used to determine the
cost ratio.
Gross profit rate (GPR)
Can be expressed as a percentage based on:
a. Sales
Computed by dividing gross profit by the net sales
Gross Profit/net sales= GPR
b. Cost
Computed by dividing gross profit by the cost of goods sold.
Gross Profit/ COGS=GPR
Cost Ratio
May be derived from gross profit rate.
Cost ratio from GPR based on sales= 100% Net Sales -GPR based on Sales
Cost ratio from GPR based on cost = 100% COGS / Net Sales (100% + GPR based on cost)
Retail Method
Used in the retail industry for measuring large quantities of inventories with rapidly changing items and
with similar margins and for which it is impracticable to use other costing methods.
Similar to the gross profit method and is variation of the retail method.
The retail method is applied using either the:
a. Average cost method
TGAS at cost is determined and divided by the TGAS at sales price to come up with the
cost ratio.
Cost Ratio= TGAS at cost / TGAS at sales price
b. FIFO cost method
Similar to the application of the Average cost method and the only difference lies on
the computation of the cost ratio.
The beginning inventories at cost and at retail are simply excluded from TGAS when
computing for the cost ratio.
Cost ratio= TGAS at cost less beg. Inventory at cost / TGAS at retail
less beg. Inventory at retail
