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Inventory- Lecture Notes

The document outlines the definition, measurement, ownership, and presentation of inventory according to PAS 2. It specifies that inventory should be measured at the lower of cost or net realizable value, detailing the costs included and excluded in inventory valuation. Additionally, it describes different cost formulas for inventory valuation, including FIFO and weighted average methods, and distinguishes between gross and net methods for recording purchases.

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Jhean Erica Rose Ferriol
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0 views

Inventory- Lecture Notes

The document outlines the definition, measurement, ownership, and presentation of inventory according to PAS 2. It specifies that inventory should be measured at the lower of cost or net realizable value, detailing the costs included and excluded in inventory valuation. Additionally, it describes different cost formulas for inventory valuation, including FIFO and weighted average methods, and distinguishes between gross and net methods for recording purchases.

Uploaded by

Jhean Erica Rose Ferriol
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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INVENTORY (PAS 2)

DEFINITION:
Held for sale in the ordinary course of business (finished goods)
In the process of production for such sale (work in process)
Materials of supplies to be consumed in the production process or in the rendering of services (Raw
materials and factory supplies)

MEASUREMENT:

General Rule: Lower of Cost or Net Realizable Value (LCNRV)

LCNRV = Estimated Selling Price Less Estimated Cost of Completion and Disposal)

Cost of Inventories:

✓ Cost of purchase – purchase price, import duties and taxes, freight, handling and other direct
acquisition costs (minus trade discounts, rebates and other similar items).
✓ Cost of conversion – direct labor and overhead (variable and fixed) incurred in conversion.
✓ Other costs

Other costs are included in the cost of inventories only to the extent that they are incurred in
bringing the inventories to their present location and condition.

Inventory cost should exclude:

❖ Abnormal waste
❖ Storage costs
❖ Administrative overheads unrelated to production
❖ Selling costs
❖ Foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a
foreign currency
❖ Interest cost when inventories are purchased with deferred settlement terms.

INVENTORY OWNERSHIP

An entity has title to the goods when

❖ Goods are owned and on hand


❖ Goods in transit and sold FOB Destination
❖ Goods in transit and purchased FOB Shipping Point
❖ Goods out on consignment
❖ Goods in the hands of salesmen or agents
❖ Goods held by customers on approval or trial
Freight Terms BUYER SELLER
Included Excluded
1) FOB shipping point

2) FOB seller Included Excluded

Included Excluded
3) FOB FAS (free alongside
ship)

Included Excluded
4) FOB CIF (cost, insurance,
and freight)

5) FOB place of the seller


Included Excluded
Included Excluded
6) Bill and hold arrangement

Included Excluded
7) Sold on installment

Included Excluded
8) Sale on with high
probability of return

Included Excluded
9) Goods manufactured at
customer’s specification

Included Excluded
10) Special order

Excluded Included
11) FOB destination

Excluded Included
12) FOB buyer

Excluded Included
13) FOB ex-ship

Excluded Included
14) FOB place of the buyer

Excluded Included
15) Lay away sales

Excluded Included
16) Sale with buyback
agreement
17) Sale under inventory Excluded Included
financing

Excluded Included
18) Hold for shipping
instruction

Excluded Included
19) Sale on trial/sale on
approval

20) Inventory pledged Excluded Included

PRESENTATION

Current Asset – for those unsold or remaining goods or items.


Cost of Sales – for those sold goods or items.
Operating Expenses – for those used office and store supplies.

COST FORMULAS

PAS 2, paragraph 25, expressly provides that the cost of inventories shall be determined by using either:
● First in, first out (FIFO)
● Weighted average

First in, First out (FIFO)


The FIFO method assumes that “the goods first purchased are first sold” and consequently the goods
remaining in the inventory at the end of the period are those most recently purchased or produced.
Accordingly, in period of inflation or rising prices, the FIFO method would result to the highest net income.
However, in a period of deflation or declining prices, the FIFO method would result to the lowest income.

Weighted average – Periodic


The average unit cost is computed by dividing the total cost of goods sold available for sale by the total
number of units available for sale.
Such weighted average unit cost is then multiplied by the units on hand to derive the inventory value.

Weighted average – Perpetual


When used in conjunction with the perpetual system, the weighted average method is popularly known as
the moving average method.
Under this method, a new weighted average unit cost must be computed after every purchase and
purchase return.
Thus, the total cost of goods available after every purchase and purchase return is divided by the total
units available for sale at this time to get a new weighted average unit cost.
Such new weighted average unit cost is then multiplied by the units on hand to get the inventory cost.

Measurement of Inventories
Inventories are required to be stated at the lower of cost and net realizable value (NRV). Inventories are
usually written down to net realizable value item by item. In some circumstances, however, it may be
appropriate to group similar or related items.

Raw materials and factory supplies


Replacement cost will be accounted for as the net realizable value. Materials and other supplies held for
use in the production of inventories are not written down below cost if the finished products in which they
will be incorporated are expected to be sold at or above cost.

Work-in-process or partially completed goods


Net realizable value of work-in-process inventory is computed by deducting estimated cost of completion
and estimated cost to sell from estimated selling price.

Finished goods
Net realizable value of finished goods inventory is computed by deducting estimated cost to sell from
estimated selling price.

GROSS METHOD VS NET METHOD

Gross Method

Purchases are recorded at gross amount


Purchase discounts are recorded only when taken
Purchase discounts are deducted from gross amount of purchase

Net Method
Purchases are recorded at net amount of discount
Purchase discount are deducted from invoice amount, whether taken or not
Recognize purchase discount lost if payment is beyond the discount period
Purchase discount lost is treated as an expense

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