INTERMEDIATE ACCOUNTING 2

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

COLLEGE OF ACCOUNTANCY AND FINANCE

Inventories the seller until they arrive at the

-​ Are assets held for sale in the ordinary customer's location.
course of business, in the process of ii.​ Example: A sofa shipped by a
production for such sale or in the for of furniture store to a customer, which
materials or supplies to be consumed in the is still considered part of the store's
production process or in rendering services. inventory until it is delivered to the
-​ IAS 2, paragraph 6, inventories are assets of customer.
an enterprise which are
-​ Held for sale in the ordinary course c.​ Goods in transit and purchased FOB
of business shipping point
-​ In the process of production for such i.​ Items purchased by the business that
sales; or are currently being transported and
-​ In the form of materials o supplies to become the property of the buyer
be consumed in the production once they leave the seller's location.
process or in the rendering of ii.​ Example: Shirts ordered by a
services. clothing retailer from a supplier that
are en route to the store. These shirts
Trading/Merchandising Business are considered part of the retailer's
-​ Merchandise Inventory inventory from the moment they
leave the supplier’s premises.
Manufacturing Business
a.​ Finished goods d.​ Goods out on consignment
b.​ Goods in process i.​ Goods sent to another party (such as
c.​ Raw Materials a retailer) for sale but remain the
d.​ Factory or Manufacturing Supplies property of the consignor (original
owner) until sold.
Service Business ii.​ Example: Paintings provided by an
-​ Labor and other costs of personnel directly artist to an art gallery for sale, which
engaged in providing the service. remain part of the artist’s inventory
until purchased by a customer.
Goods included in the Inventory
a.​ Goods owned and on hand e.​ Goods in the hand of salesmen or agents
i.​ These are items that are currently in i.​ Items that have been provided to
the possession of the business, stored sales agents to sell on behalf of the
either in their retail space, business.
warehouse, or other storage facilities. ii.​ Example: Jewelry items given to a
ii.​ Example: Books stocked on the salesperson to sell at various trade
shelves of a bookstore that are shows are still considered part of the
available for sale. jewelry company's inventory until
they are sold.
b.​ Goods in transit and sold FOB
destination f.​ Goods held by customers on approval or
i.​ Goods that have been shipped to the on trial.
customer but remain the property of i.​ Products given to customers for
evaluation or trial purposes but still
 INTERMEDIATE ACCOUNTING 2
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY AND FINANCE

legally owned by the business until Total Inventory Cost​​ ​ 5,700,000

the customer formally accepts or Measurement of Inventories
purchases them. -​ Inventory measurement is crucial to ensure
ii.​ Example: A sofa taken by a that assets are accurately reflected in
customer on a trial basis from a financial statements. Inventories are first
furniture store, which remains part of measured at their cost, then later adjusted to
the store's inventory until the reflect their lower of cost or net realizable
customer decides to purchase it. value (LCNRV) if necessary.

Practice Problem: Initial

-​ The initial cost of inventory includes
everything spent to acquire the items and
prepare them for sale or use in production.
This cost can be broken down into three
main categories:

Cost of Inventories
●​ Cost of Purchase - The total expense of
acquiring the inventory. It includes:
a.​ Add: Purchase Price
i.​ The amount paid to suppliers
for the inventory.
b.​ Import Duties
i.​ Taxes on goods brought into
the country.
c.​ Irrecoverable Taxes
i.​ Taxes that cannot be claimed
back (e.g., non-refundable
sales taxes).
d.​ Freight Cost
i.​ Shipping expenses to get the
inventory to the business
location.
e.​ Handling Cost
i.​ Costs associated with
moving, storing, or managing
the inventory.
f.​ Other directly attributable cost
i.​ Any additional costs directly
linked to purchasing the
goods.
g.​ Less: Trade Discounts
i.​ Price reductions given by
suppliers.
 INTERMEDIATE ACCOUNTING 2
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY AND FINANCE

h.​ Rebates c.​ Fixed Overhead

i.​ Partial refunds or discounts i.​ Costs that stay the same
applied after purchase. regardless of production
volume, like factory rent.
IGNORED TREATMENT (NO NEED TO ADD d.​ Variable Overhead
OR DEDUCT) i.​ Costs that vary with
●​ Foreign Exchange Differences production levels, like
a.​ Variations in cost due to changes in electricity costs depending on
currency exchange rates. how many machines are
●​ Interest Expense over Financing Period running.
a.​ Financing costs incurred when
purchasing inventory on credit over a ●​ Cost of Agricultural Produce Harvested
specific period. from Biological Assets
b.​ If included siya, need ideduct. ●​ Other cost incurred in brining the
inventories to their present and location
●​ Cost of Conversion - The expenses involved and condition.
in transforming raw materials into finished a.​ Cost incurred due to customer’s
products. These include: specifications
a.​ Add: Direct Labor
i.​ Wages paid to workers who Exclusions from Cost of Inventories
are directly involved in A.​ Abnormal amount of wasted materials, labor
manufacturing the product. or other production costs
b.​ Overhead a.​ Unexpected losses of materials,
i.​ Factory Expenses labor, or other production costs (e.g.,
1.​ Costs to maintain and a factory fire that destroys raw
operate the factory materials).
(e.g., machinery B.​ Storage costs, unless those costs are
repairs, factory necessary for the production process prior to
utilities). a further production stage.
ii.​ Indirect Material a.​ Costs of storing inventory, unless
1.​ Materials used in they are necessary for production
production but not (e.g., maturing cheese in a
directly traceable to cheese-making process).
specific items (e.g., C.​ Administrative expense
glue, cleaning a.​ General business costs, such as
supplies). office staff salaries or utility bills,
iii.​ Indirect Labor not directly tied to production.
1.​ Wages for support D.​ Distribution/Selling Expenses
staff, such as a.​ Costs involved in marketing, selling,
supervisors or quality and delivering products to customers
inspectors, who are (e.g., advertising costs, delivery
not directly making expenses).
the product.
 INTERMEDIATE ACCOUNTING 2
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY AND FINANCE

E.​ Profit margins or non-attributable overheads HOW TO DETERMINE OVERHEAD RATE:

that are often factored into prices chare by
service providers.
a.​ Any markups or unrelated overheads
often factored into the prices charged ​
by service providers. ​
​
Subsequent Measurement ​
-​ LCNRV - Lower of Cost and Net Realizable ​
Value ​
-​ After the inventory is initially recorded at ​
cost, it must be reviewed regularly. If the ​
inventory's value drops (due to damage, ​
obsolescence, or market price declines), it ​
should be measured at the lower of its cost
or net realizable value (NRV). NET REALIZABLE VALUE
-​ Net Realizable Value (NRV): The -​ Is the estimated selling price in the ordinary
estimated selling price of the inventory in course of business less estimated cost of
the normal course of business, minus the -​ completion and the estimated cost of
estimated costs of completing and selling it. disposal
-​ NRV = Selling Price - Cost to Complete -
Practice Problem: Cost to Sell
-​ Kinukuha kung sino mababa between cost
and Net Realizable Value because of
Principle of Conservatism (huwag irerecord
agad if hindi naman yun yung amount na
marerealize)
-​ Item by item on basis

Reasons why Selling Price is lower than the Cost:

1.​ Inventories are damages
2.​ Inventories have become wholly or partially
obsolete
3.​ The selling price has declined.
4.​ Estimated cost of completion/ Cost of
Disposal has increased.

RULE:
-​ Cost > Net Realizable Value = w/ inventory
writedown
-​ Cost < Net Realizable Value = no inventory
writedown
 INTERMEDIATE ACCOUNTING 2
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY AND FINANCE

ACCOUNTING METHOD: Entry for inventory Practice Problem:

writedown

Direct (Cost of Goods Sold)

​ Inventory, end ​ ​ Xxx
​ Income Summary ​​ Xxx

Presentation:
Inventory, beg​​ ​ xxx
Net Purchases​​ ​ xxx
TGAS​ ​ ​ ​ xxx
Inventory, end​​ (xxx)
COST OF GOODS SOLD xxx

​
Allowance Method ​
​ Loss on inventory writedown ​ Xxx ​
Allowance on inventory writedown Xxx ​
​
Presentation: ​
Inventory, beg​​ ​ ​ xxx ​
Net Purchases​​ ​ ​ xxx ​
TGAS​ ​ ​ ​ ​ xxx ​
Inventory, end​​ ​ (xxx) ​
COGS, before writedown ​ ​ xxx ​
Add: Loss on inv. Writedown xxx ​
COGS, after writedown​ xxx ​
​
Reversing entry (if nakabawi sa loss on ​
inventory writedown) ​
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Allowance on inventory writedown Xxx
​ Gain on inventory writedown xxx Trade Discounts
-​ Are deductions from the list/catalog price in
Presentation: order to arrive at the invoice price which is
Inventory, beg​​ ​ ​ xxx the price actually charged to the buyer. It’s
Net Purchases​​ ​ ​ xxx purpose is to encourage trading or increase
TGAS​ ​ ​ ​ ​ xxx sales.
Inventory, end​​ ​ (xxx) -​ It is not recorded in a journal entry.
COGS, before writedown ​ ​ xxx
Less: Gain on inv. Writedown (xxx) Cash Discounts
COGS, after writedown​ xxx -​ Are deductions from the invoice price when
the payment is made within the discount
period. Its purpose is to encourage prompt
payment.
 INTERMEDIATE ACCOUNTING 2
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY AND FINANCE

-​ It is recorded in journal entry with the -​ SELLER

account title of Sales Discount or Purchase Freight Prepaid
Discount (depends on POV) -​ Freight is actually paid before shipment
Freight Collect
Practice Problem:​ -​ Freight charge on the goods shipped is not
yet paid.
FAS/Free alongside
​ -​ transfers ownership when the goods are
​ alongside the carrier.
​ CIF/Cost, Insurance, Freight
​ -​ Buyer assumes CIF
​ Ex-ship
​ -​ Seller transfers the title after the goods are
​ unloaded.
​
​ “Who owns the good shoulders the freight”​
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​ FOB Shipping Point - Buyer - Freight Collect
​ FOB Destination - Seller - Freight Prepaid​
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Goods on Transit
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FOB
-​ Free on Board
FOB Shipping Point
-​ Ownership is transferred upon shipment of
goods.
-​ BUYER
FOB Destination
-​ Ownership is transferred only upon receipts
of goods by the buyer.
 INTERMEDIATE ACCOUNTING 2
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY AND FINANCE

​ 3.​ Discount, Return and Allowances

​ Accounts Payable​ ​ xxx
​ ​ Purchase Discount/Ret/Allow​ xxx
​
​ 4.​ Sale of Merchandise
​ Accounts Receivable​ ​ xxx
​ ​ ​ Sales​ ​ ​ ​ Xxx
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​ 5.​ Return of Merchandise
​ ​ Sales Return​ ​ ​ xxx
​ ​ ​ Accounts Receivable​ ​ xxx
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6.​ Inventory at year end
Inventory, end​​ ​ xxx
Consignment ​ Income Summary​ ​ xxx
-​ A method of marketing goods in which the
owner called the consignor transfers
physical possession of the goods to an agent
called the consignee who sells them in the Perpetual System
owner's behalf. -​ Requires the maintenance of records called
-​ “Consignment out” included in the stock cards that usually offer a running
inventory summary of the inventory inflow and
-​ “Consignment in” excluded in the inventory outflow
-​ Consignor will record the sales. -​ High value and low volume
-​ Consignee will receive commission -​ With stock card
-​ Consignor will record the commission -​ Always updated
expense or advertising expense.
1.​ Purchase of Merchandise
Periodic System Inventory​ ​ ​ xxx
-​ Calls for the physical counting of goods on ​ Accounts Payable​ ​ Xxx
hand at the end of accounting period to
determine quantities 2.​ Payment of Freight
-​ Low value & high volume Inventory​ ​ ​ xxx
-​ Updated only when financial statements are ​ Cash​ ​ ​ ​ Xxx
prepared
3.​ Discount, Return and Allowances
1.​ Purchase of Merchandise Accounts Payable​ ​ xxx
Purchases​ ​ ​ xxx ​ Inventoty​ ​ xxx
​ Accounts Payable​ ​ Xxx
4.​ Sale of Merchandise
2.​ Payment of Freight Accounts Receivable​ ​ xxx
Freight In​ ​ ​ xxx ​ ​ Sales​ ​ ​ ​ Xxx
​ Cash​ ​ ​ ​ Xxx
​ COGS​​ ​ ​ Xxx
​ ​ Inventory ​ ​ ​ xxx
 INTERMEDIATE ACCOUNTING 2
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY AND FINANCE

5.​ Return of Merchandise

​ Sales Return​ ​ ​ xxx ​
​ ​ Accounts Receivable​ ​ xxx ​
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​ Inventory​ ​ ​ Xxx ​
​ ​ COGS​​ ​ ​ xxx ​
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6.​ Inventory at year end ​
NO ENTRY unless there is shortage/overage ​
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Practice Problem: ​
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FIFO (First In, First Out)
-​ This method assumes that “the goods first
purchased are first sold” and consequently
the goods remaining in the inventory at the
end of period are those most recently
purchased ot produced.

FIFO-Periodic
​ ​ ​ Units Units Cost Total Cost
​ From Jan.29 prch.​ 200 10​ ​ 2000
​ From Jan.31 prch. 100 15​ ​ 1500
​ Ending Inventory​ 300​ ​ ​ 3500
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​ FIFO-Perpetual
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 INTERMEDIATE ACCOUNTING 2
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY AND FINANCE

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Practice Problem ​
 INTERMEDIATE ACCOUNTING 2
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY AND FINANCE

MEASURING INVENTORIES AT INITIAL -​ Purchase commitments can be cancellable or

RECOGNITION non-cancellable.
★​ If it is cancellable, we will disclose it to the
Goal: When using cost formulas, the goal is to notes in the financial statement.
allocate the cost to the cost of goods sold and the ○​ There are 3 instances to recognize
ending inventory. that purchase commitment is
cancellable
Inventories should be measured @ Lower of Cost or ■​ Future loss is possible
Net Realizable Value. You will be comparing the ■​ The amount commitment can
two amounts and you will use the lower amount. be reasonably estimated
■​ The amount estimated is
Net Realizable Value material.
-​ Estimated Selling Price less Estimated Cost ★​ If it is non-cancellable and the loss is
to Complete less Estimated Cost to Sell. probable and material and kayang estimate,
we will record liability and losses
If the finished goods na pagagamitan ng material ay
mabebenta above or at cost, HINDI I-WRIWRITE ​
DOWN.

If the finished goods are recorded at the Lower of

Cost, the material is I-WRIWRITE DOWN sa NRV
pero hindi laging given si NRV so ang ginagamit
commonly ay REPLACEMENT COST.

Note: hindi basta basta nag-wriwrite down kapag

MATERIAL.
-​ If FINISHED GOODS, apply LCNRV item
by item.
-​ If WORK IN PROCESS, apply LCNRV
item by item.
-​ If MATERIAL, will follow the FINISHED
GOODS. (if si finished goods ay niwrite
down, si material is iwriwrite down to
Lower of Cost or Replacement Cost. If si
finished goods ay hindi niwrite down, no
need na iwrite down si material)

Purchase Commitment
★​ You are committing and purchasing an
inventory at a certain price. Since, prices
fluctuate most specially when you are
purchasing in dollars or foreign rates, most
people do is to lock in some amount and that
amount is the payable we will recognize.