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INTACC 1 - Inventory Valuation

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44 views8 pages

INTACC 1 - Inventory Valuation

Uploaded by

quintanamarfrancis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INVENTORIES

INTACC 1
Inventory Cost Valuation
➢ Specific Identification of Cost
➢ First
in First Out (FIFO)
➢ Weighted Average
Specific Identification of Cost
➢ The cost of inventories of items that are not ordinarily
interchangeable, and goods or services produced and
segregated for specific projects shall be assigned by
using specific identification of their individual costs:
Specific identification of cost involves tracing an item
sold, or an item remaining in inventory, to the specific
item that was purchased. It is inappropriate to use this
method when there are large numbers of items of
inventory that are ordinarily interchangeable because
selecting those items that remain in inventories could
be used to obtain predetermined effects on profit or
loss.
➢ In this case, PAS 2 allows either of FIFO and Weighted
Average.
FIFO
 The "first-in-first-out'' or FIFO technique,
assumes that any item sold was the oldest
item purchased and still held, and therefore
the items remaining in inventory at the end of
the period are those most recently purchased
or produced. The FIFO method is generally
used, since it is most likely to approximate the
physical flow of goods sold, resulting in the
most accurate measurement of cost flows.
Weighted Average
 The weighted average cost method allows you to
mingle the costs of similar items purchased and use
weighted averages to measure inventories held, either
on a periodic basis or as each shipment is received. The
weighted, average cost method is used in packaged
inventory systems that are computer controlled,
although its results are not very different from FIFO in
times of relatively low inflation or where inventory
turnover is high.
 Under the American standard, weighted average means
that the company is using periodic method while the
term moving average is used if the company uses the
perpetual method.
Change in Inventory Method
 Change in inventory method from FIFO to weighted average or
vice versa is regarded as change in accounting policy under PAS 8
Accounting Policies, Changes in Accounting Estimates and Errors.
Therefore, the change should be applied retrospectively.
 If the ending inventory of last year was overstated, net income
and retained earnings last year were overstated.
 On the date of change, the effect would be overstatement of
beginning inventory, net income this year is understated but the
ending retained earnings would be correct.
 If the ending inventory of last year was understated, net income
and retained earnings last year were understated.
 On the date of change, the effect would be understatement of
beginning inventory, net income this year is overstated but the ending
retained earnings would be correct since the effect of the error is
counter-balancing.
Purchase Commitments
 A purchase commitment is a non-cancelable agreement to
purchase goods sometime in the future at a fixed price
and fixed quantity.
 When there is a reasonable certainty that inventories
purchased under purchase commitments become
Impaired, loss on purchase commitment should be
recognized in the period such impairment has been
determined.
 Any recovery may be recognized as gain but such gain to
be recognized should be limited to the loss recognized
previously.
Accounting for Purchase
Commitments

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