INVENTORIES

-As defined in PAS 2 paragraph 6, inventories are assets held for sale in the ordinary
course of the 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.

Inventories includes the following:

a) Asset held for sale in the ordinary course of business ( finished goods)
b) Asset in the production process for sale in the ordinary course of business (work in
process)
c) Materials and supplies that are consumed in production (raw materials)
d) Purchased subcomponents
e) Goods held by a trader for resale
Costs of Purchase
The costs of purchase of the inventories compromise the
1. Purchase price
2. Import duties and other taxes (other than those subsequently recoverable by the
entity from the taxing authorities)
3. Transport, handling and other costs directly attributable to the acquisition costs of
finished goods, materials and services.

Any trade discounts, rebates, and other similar items are deducted in determining
the costs of purchase.
Inventory bought on deferred credit terms, the excess of price paid over the amount to
be paid under normal credit terms is recognize as interest expense
Costs of Conversion
- a complex aspect of inventory measurement and may require the use of a sophisticated costing
system to record the various inputs. It includes costs of direct labor and materials and also the
following:
1. Variable production overheads – those indirect costs of production that vary directly, or
nearly directly, with the volume of production, such as indirect materials and indirect labor. It is
allocated to each unit of production based on the actual use of the production facilities.
2. Fixed production overheads - those indirect costs of production that remain relatively
constant regardless of the volume of production, such as depreciation and maintenance of factory
buildings and equipment, and the cost of factory management and administration. It is allocated to
each unit of production based on normal capacity of the production facilities.
3. Joint products – are produces and their costs of conversion are not separately identifiable,
costs of conversion are allocated between them on a rational and consistent basis.
Other Costs
- are included only to the costs of inventories to the extent that they are incurred in bringing the
inventories to their present location and condition. Examples are
1. Borrowing Costs– This requires capitalizing interest on inventories which take a
substantial amount of time to create.
2. Storage Costs - This can be included for products that require a maturation process or
substantial amount of time to create.
3. Non production overhead or costs of designing products for specific customer–
This can be included in costs if they contribute in bringing the inventories to their present
condition and location.

EXCLUDED FROM COSTS OF INVENTORIES

● Abnormal amounts of wasted materials, labor, or other production costs
● Storage costs ( unless essential to the production process)
● 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.
 The costs set out below are those typically incurred by manufacturing businesses
Items
1 Supplier's gross price for raw materials, P150,000
materials purchased from another supplier on extended credit amounting to P570,000. The
2
price to be paid under normal credit term is P550,000
Invoice price of raw materials purchased amounting P180,000. Quantity discounts of 10, 5 are
3
allowed by supplier.
Materials purchased from a supplier amounting P616,000, inclusive of 12%VAT. The
4
company is VAT registered and can claim this as an input VAT.
Materials purchased from a supplier amounting P515,000, inclusive of nonrecoverable
5
purchase tax of P15,000.
6 Costs of transporting raw materials to the business premises, P5,000
Import duties paid to authorities in import of raw materials to be used during the
7
manufacturing process,P25,000
8 Labor costs directly incurred in the processing of raw materials, P420,000
9 Normal amount of wasted labor,P57,000
10 Abnormal amount of wasted labor, P69,000
11 Variable costs (electricity0 incurred in the processing of raw materials, P10,000

Required: identify the costs as either inventoriable or not and determine the amount to be
included as part of inventory.
 Inventoriable? Amount Selected Explanations
1 Yes P150,000
The amount to be recorded is based on the price
under normal credit term. The difference between
2 Yes P550,000
the price under normal credit and extended is
recorded as interest ober the credit term.
Invoice price means the quantity discount or trade
3 Yes P180,000
discount was already deducted.
This is an example of recoverable purchased tax
4 Yes P550,000
since it can be claimed as an input VAT.

5 Yes P515,000

6 Yes P5,000
7 Yes P25,000
8 Yes P420,000
9 Yes P57,000
10 No Abnormal waste is not inventoriable
11 Yes P10,000
INVENTORIES OF MERCHANDISING
AND MANUFACTURING COMPANIES
-In a merchandising business they called their inventories as Merchandise Inventory, in which they
buy and sells goods. In a manufacturing business there inventories include Direct or raw materials, Work
in process, Finished goods, and Factory supplies (including indirect raw materials), where they
buys raw materials to convert in to finished goods.
The flow of costs of Merchandise and Manufacturing Company
Merchandise Company:
Costs Balance Sheet Inventories Income Statement Expenses
Merchandise Merchandise
Purchases Inventory Costs of Sales

Selling and Admin Period Expenses Selling and Admin

Manufaturing Company:
Costs Balance Sheet Inventories Income Statement Expenses
Materials Purchases Raw Materials

Direct Labor Work in Process

Manufacturing Overhead Finished Goods

Cost of good sold
Selling and Admin Period Expenses
Selling and Admin
OVERVIEW OF COST FLOWS
Direct Materials or Raw Materials
Beginning Balance xxx xxx Balance end
Net Purchases xxx xxx Direct materials used
Total

Work in Process
Beginning balance xxx xxx Balance end

Direct materials used xxx xxx Cost of goods manufactured

Direct labor xxx
Applied factory overhead xxx
Total

Finished Goods
Beginning balance xxx xxx Balance end

Cost of Good Manufactured xxx xxx Cost of goods sold

Total
 Statement of Cost of Goods Manufactured and Sold
Raw materials inventory, beginning xxx
Add: Net purchases xxx
Purchases xxx
Add: Freight-in xxx
Gross Purchases xxx
Less: Purchase returns and allowance xxx
Purchase discounts xxx xxx
Raw materials available for use xxx
Less: Raw materials end xxx
Raw materials used xxx
Add: Direct labor xxx
Applied factory overhead xxx
Total manufacturing cost xxx
Add: Work in process, beginning xxx
Total cost of goods placed into process xxx
Less: Work in process, end xxx
Cost of goods manufactured xxx
Add: Finished goods, beginning xxx
Total cost of goods available for sale xxx
Less: Finished goods, end xxx
Cost of goods sold xxx
Items to be included in Inventory
1. Goods in transit from supplier Whose inventory is it?
a. FOB shipping point Buyer
b. FOB destination Seller
2. Consigned goods Consignor(seller)
3. Sales out on approval Seller
4. Sales with buyback agreement (or
product financing arrangement) Seller
5. Sales with right of return Buyer
6. Sales on installments Buyer
7. Segregated goods in the warehouse
a. Special-order goods Buyer upon completion
b. Hold for shipping instructions Seller
As part of your engagement to audit the financial statements of Acuna Company for the year ended
December 31, you have been assigned the merchandise inventory account. You found the following
items to be included in the merchandise inventory:
Items counted in the warehouse (bodega) (including P32,00 damaged and
unsalable goods) 4,000,000
Items counted in the count specifically segregated per sales contract 80,000
Goods held on consignment, at sales price, cost P125,000 250,000
Items in receiving department, returned by the customer, in good condition 60,000
Goods out on consignment, at sales price, cost P150,000 200,000
Items ordered and in the receiving department, invoice not yet received 30,000
Items ordered, invoice received but goods not received.
Freight is paid by buyer 100,000
Items on counter for sale 150,000
Items in receiving department, refused by the entity because of damage 200,000
Items in shipping department 220,000
Items in shipped today, invoice mailed, FOB shipping point 35,000
Items in shipped today, invoice mailed, FOB destination 25,000
Items currently being used for window display 13,000
Total 5,363,000

Required: Compute for the correct amount of inventory

Items counted in the warehouse (bodega)(4,000,000 - 3,888,000
32,000 - 80,000)
Items in receiving department, returned by customer, in 60,000
good condition
Goods out on consignment, at cost 150,000
Items ordered and in the receiving department, invoice 30,000
not yet received
Items ordered, invoice received but goods not received.
Freight is paid by buyer 100,000
Items on counter for sale 150,000
220,000
Items in shipping department
Items currently being used for window display 13,000
Total 4,636,000
 ACCOUNTING FOR CONSIGNMENT OF INVENTORIES
Transaction CONSIGNOR Dr Cr
1. Shipment of goods on consignment Inventory on consignment xxx
Finished goods xxx

2. Payment of expenses by consignor Inventory on Consignment xxx

Cash xxx

3. Payment of expenses by consignee Inventory on Consignment xxx

Consignee payable xxx

4. Sale of merchandise No Entry

5. Notification of sale to consignor and payment of cash due Commission exp. xxx
Consignee payable xxx
Consignment sale revenue xxx

Cost of good sold xxx

Inventory on consignment xxx
 ACCOUNTING FOR CONSIGNMENT OF INVENTORIES
Transaction CONSIGNEE Dr Cr
1. Shipment of goods on consignment No Entry ( memo
control record)

2. Payment of expenses by consignor No Entry

3. Payment of expenses by consignee Consignor receivable xxx

Cash xxx
Cash xxx
4. Sale of merchandise
Consignor payable xxx

5. Notification of sale to consignor and Consignor payable xxx

payment of cash due Cash xxx
Cash xxx
Commission revenue xxx
Two systems of accounting for Inventories
Perpetual Inventory System Periodic Inventory System

Used for low-volume, high cost items, such as Use for relatively low value inventory
automobiles and jewerly. Because of items such ash inventory of grocery
technology, perpetual inventory system may stores
be used also for low value inventory with aid
of point-of-scale (POS) devices connected with
the company's inventory system.

The inventory account is updated for each The inventory account is updated only
purchase, slae and return (i.e sales return when financial statements are
and purchased return) of inventory. prepared.

Physical count is performed to determine the Physical count is performed to

accuracy of the balance per records. determine the ending balance of
inventory and to compute for the cost
of goods sold. Unlike in perpetual
inventory system, cost of goods sold is
a residual amount.
 Two systems of accounting for Inventories
Perpetual Inventory System Periodic Inventory System
Purchase returns, discounts and Purchase returns, discounts and
allowances are recrded by crediting allowances are recorded by
the inventory account. crediting the appropriate
purchases account.
Freight in is debited directly to the Freight incurred when the
inventory account. inventory was purchased is
debited to "Freight -in" account.
Account used: Inventory Accounts used: Inventory
beginning, inventory ending
purchases, freight-in, purchase
returns, purchase allowance and
purchase discount.
 Transaction Perpetual Inventory System Periodic Inventory System

To record purchase and

freight - in Inventory xxx Purchases xxx
Accounts Payable/
Cash xxx Freight-in xxx
Accounts
payable/Cash xxx
To record purchase returns,
discounts and/or allowances Accounts payable xxx Accounts Payable xxx
Purchases
Inventory xxx ret./allow./disc. xxx
To record saleas and cost of
Inventory sold Cash/AR xxx Cash/AR xxx
Sales xxx Sales xxx
Cost of good sold xxx
No journal entry
Inventory xxx
To record sales return Sales Return xxx Sales return xxx
Accounts
Accounts receivable xxx Receivable xxx
Inventory xxx
No journal entry
Cost of good sold xxx
 Transaction Perpetual Inventory System Periodic Inventory System

To record sales allowance Sales

Sales allowances/discount xxx xxx
or sales discount allowances/discount
Accounts receivable xxx Accounts receivable xxx
Inventory - end xxx
Cost of good sold xxx
No closing entries since all
inventory related Cost of good sold xxx
Closing entries transaction is directly Purchases
debited or credited to the ret./allow./disc. xxx
account Purchases xxx
Freight - in xxx
Inventory - beginning xxx
To record inventory
No journal entry. Inventory shortage or
shortage or shrinkage Loss on inventory shortage xxx
overage is buried in the cost of sales
Inventory xxx
ILLUSTRATION:
At the beginning of January 1, Tristan Company has 2,000 inventories
costing 20 per unit. The following chronological transactions transpired
during the year:
1) Purchased on account 3,000 units of inventory at 20 per unit.
2) Sold on account 2,500 units of inventory for 50 per unit.
3) Purchased on account 4,000 units of inventory at 20 per unit.
4) Sold on account 3,000 units of inventory for 50 per unit.

5) On December 31, physical count revealed that 3,500 units were on hand.

Required: Prepare all the necessary journal entries using:

a. Perpetual inventory system.
b. Periodic inventory system.
SOLUTION:
Perpetual Inventory System
Inventory (3,000 x 20) 60,000
Account payable 60,000
Accounts receivable 125,000
Sales (2,500 x 50) 125,000
Cost of good sold 50,000
Inventory (2,500 x 20) 50,000
Inventory (4,000 x 20) 80,000
Account payable 80,000
Account receivable 150,000
Sales (3,000 x 50) 150,000
Cost of good sold 60,000
Inventory (3,000 x 20) 60,000
No closing entries since all inventory related
transaction is directly debited or credited to the
account
Loss on invetory shortage 10,000
Inventory 10,000
SOLUTION:
Periodic Inventory System
Purchased(3,000 x 20) 60,000
Account payable 60,000
Account receivable 125,000
Sales (2,500) x 50) 125,000
Purchased (4,000 x 20) 80,000
Accounts payable 80,000
Accounts receivable 150,000
Sales (3,000 x 50) 150,000
Inventory, end (3,500 x 20) 70,000
Cost of goods sold 110,000
Purchases (60,000 + 80,000 140,000
Inventory, beg (20 x 2,000) 40,000
No journal entry. Inventory shortage or overage is included in the
cost of goods sold.
 SUBSEQUENT MEASUREMENT
-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 the group similar or
related items.

Net Realizable Value

NRV is the estimated selling pride in the ordinary course of business, less the estimated
cost of completion and the estimated costs necessary to make the sale. In other words, the
following are the net realizable values of the different types of inventories:

1) Raw Materials and Factory supplies

Replacement cost. 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.
2) Work in process or partially completed goods
Estimated selling price less estimated cost of completion less estimated cost of sell
3) Finished Goods
Estimated selling price less estimated cost to sell
Write – Down and Reversal

Any write-down to NRV should be recognized as an expenses in the period in

which the write-down occurs.
Any reversal should be recognized in the income statement in the period which
the reversal occurs.

Two Methods of Accounting for the Lower of Cost or Net

Realizable Value
1. Direct Method
Merchandise inventory beginning (at LCNRV) xxx
Add: Net purchases xxx
Total goods available for sale xxx
Less: Merchandise inventory end (at LCNRV) xxx
CGS after inventory write-down xxx
2. Allowance Method
Merchandise inventory beginning (at cost) xxx
Add: Net purchases xxx
Total goods available for sale xxx
Less: Merchandise inventory end (at cost) xxx
CGS before inventory write - down xxx
Add: Loss on inventory xxx
Less: Gain on reversal of inventory, write-down xxx
CGS after inventory write-down xxx

Gain or loss may be computes as follows:

Merchandise inventory,end (at cost) xxx
Less: Merchandise inventory, end (at LCNRV) xxx
Required allowance xxx
Less: Allowance for inventory,write-down,beg xxx
Loss(gain) on inventory write-down xxx
Determination of cost
1. Specific identification of cost - Items in inventory that are not ordinarily
interchangeable and goods or services produced and segregated for specific projects shall
be assigned in using the specific identification of cost.
2. FIFO ( First in First out) – It is technique where by 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.
3. Weighted average – It allows to mingle the cost similar items purchased and use
weighted averages to measure inventories held, either on a periodic basis or as each
shipment is received.
Unit cost = Total Goods Available for sale/ Units available for sale
Cost of ending inventory = Unit cost x units in the ending inventory
Cost of sale = Unit cost x units sold
 The Sonny Company sells blankets for P30 each. The following was taken from the
inventory record during July.
Date Product T Units Cost
3-Jul Purchase 500 P15
10-Jul Sale 300
17-Jul Purchase 1,000 P17
20-Jul Sale 600
23-Jul Sale 300
30-Jul Purchase 1,000 P20
Required: Determine the cost of sales and cost of ending inventory under each of the
following independent assumptions:
1. First in First out method (periodic)
2. First in First out Method (Perpetual)
3. Weighted Average Method
4. Moving Average Method
1. First in First out Method ( periodic)
Cost of Sales: Unit sold (300+600+300) = 1,200
Date Qty Unit Cost Total Cost
July 10 Sale - (from july 3) 300 15 P4500
July 20 Sale - (from july 3) 200 15 3,000
July 20 Sale - (from july 17) 400 17 6,800
July 23 Sale - (from july 17)(squeeze) 300 17 5,100
Total Cost of Sales 1,200 P19,400
Cost of ending inventory:
Units in the ending inventory = 500+1,000+1,000-300-600-300
= 1,300
Date Qty Unit Cost Total Cost
17-Jul 300 17 5,100

30-Jul 1,000 20 20,000

1,300 25,100
2. First in First out Method ( perpetual)
Purchases Cost of merchandise sold Inventory
Total Total Unit
Date Qty Unit cost Cost Qty Unit cost cost Qty cost Total cost
3-Jul 500 15 7,500 500 15 7,500
10-Jul 300 15 4,500 (300) 15 (4,500)
Balance 200 15 3,000
17-Jul 1,000 17 17,000 1,000 17 17,000
Balance 1,200 20,000
20-Jul 200 15 3,000 (200) 15 (3,000)
400 17 6,800 (400) 17 (6,800)
23-Jul 300 17 5,100 (300) 17 (5,100)
Balance 300 17 5,100
30-Jul 1,000 20 20,000 1,000 20 20,000
Total 2,500 44,500 1,200 19,400 1,300 25,100
3. Weighted Average Method
Qty Unit cost Total cost
Beginning Inventory -
Purchases:
3-Jul 500 15 7,500
17-Jul 1,000 17 17,000
30-Jul 1,000 20 20,000
Total goods available for sale 2,500 17.8 44,500

Cost of Sale = 17.80 x 1,200

= 21,360
Cost of ending inventory = 17.80 x 1,300
= 23,140
4. Moving Average Method
Cost of merchandise
Purchases sold Inventory
Unit Total Unit Total Unit Total
Date Qty cost Cost Qty cost cost Qty cost cost
3-Jul 500 15 7,500 500 15 7,500
10-Jul 300 15 4,500 (300) 15 (3,000)
Balance 200 15 3,000
17-Jul 1,000 17 17,000 1,000 17 17,000
Balance 1,200 16.67 20,000
20-Jul 200 16.67 10,000 (600) 16.67 (10,000)
Balance 600 16.67 20,000
23-Jul 300 16.67 5,000 (300) 16.67 (5,000)
Balance 300 16.67 5,000
30-Jul 1,000 20 20,000 1,000 20 20,000
Total 2,500 44,500 1,200 19,500 1,300 25,000
 - A purchased commitment is a non cancelable
agreement to purchased goods sometime in the future at a
fixed price and fixed quantity.
- When there is a reasonable certainty that inventories
purchased under 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 Purchased Commitments
Transaction Journal Entries
1. Commitment to purchased inventory in No journal entry (disclosure of the exsistance of
the future. the commiment in the financial statements.)
2. The value of the inventory purchased
under the purchase commitment is Loss on purchase commitment XX
determined to have been impaired.
Liability on purchase commiment XX
3. The goods are received.
Purchased (at lower of purchase XX
commitment and replacement
cost)
Accounts payable/ Cash XX
4. Recovery before goods is received. Liability on purchase commitment XX
Gain on market recovery XX
 -a purchase transaction denominated in a currency other than Philippines peso. This
arises if a Philippines company will import or buy inventory from foreign company and the
payment is denominated in a currency in of the foreign company. The Philippine company must
buy a foreign currency in order to pay its liabilities in foreign currency. Depending on the
circumstances, gain or loss may be recognized in the purchase transactions because of the
fluctuation in the currency exchange rate. Also known as foreign currency exchange risk.

Accounting for foreign currency transaction of inventories

1. Date of purchase. Record both the inventory and payable account at the spot rate on the date
of transaction.
2. Reporting date. Remeasure the monetary items (e.g., accounts payable) at the spot rate on the
reporting date in accordance with PAS 21. Foreign currency gain or loss is included in profit or
loss.
3. Settlement date. Record the amount paid using the spot rate on the settlement date. Any
difference between the amount paid and the recorded liability is treated as gain or loss in profit
or loss.
Use of Estimate in Inventory Estimation
1. The inventory is destroyed by fire and other catastrophe, or theft of the merchandise
has occurred and the amount of inventory is required for insurance purposes.
2. A physical count of the goods on hand is made and it is necessary to prove the
correctness or reasonableness of such count by making an estimate.
3. Interim financial statements are prepared and a physical count of the goods on hand
is not necessary either because it may take time to do the same or because only an
estimate thereof is required to fairly present the financial position and performance of
the entity.

Two Approaches in Estimating the Value of Inventory

1. Gross Profit Method
2. Retail Inventory Method
Based on the entity's past experience, the average gross profit rate may
be used to estimate the cost of goods sold as well as the ending
inventory to be reported in the interim financial statements.
Gross profit method is useful when:
1) A periodic system is in use and inventories are required for interim
statements.
2) Invertories have been destroyed or lost by fire, theft, or other
casualty, and the specific data required for inventory valuation are not
available.
3) The relationship between gross profit and sales remains stable over
time.

However, the gross profit method would not be useful when:

1) There is a significant change in the mix of products being sold and
the gross margin percentage changes significantly during the year.
2) Estimating inventories to be reported in th annual financial
statements.
Formulas:
Gross Profit Based on Sales
Sales xx 100%
Less: Cost of goods sold xx 75%
Gross Profit Based on Sales xx 25%
Gross profit = GP rate x Sales
Cost of goods sold = Cost ratio x Sales
Gross Profit Based on Cost
Sales xx 125%
Less: Cost of goods sold xx 100%
Gross Profit xx 25%
Gross profit = GP rate x Sales/Sales Ratio
Cost of goods sold = Sales/Sales Ratio
Determine the Gross Profit Rate

1. Look for the possible trend.

2. If the problem staes that "Average Gross Profit" would be
used, then
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑅𝑎𝑡𝑒 𝑌𝑒𝑎𝑟 1 + 𝑌𝑒𝑎𝑟 2 + 𝑌𝑒𝑎𝑟 𝑛
Average Gross Profit =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑌𝑒𝑎𝑟

3. If the problem states that "The overall gross profit ratio for
the past years was in effect during the year of fire or theft" ,
then
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑅𝑎𝑡𝑒 𝑌𝑒𝑎𝑟 1 + 𝑌𝑒𝑎𝑟 2 + 𝑌𝑒𝑎𝑟 𝑛
Overall Gross Profit = 𝑆𝑎𝑙𝑒𝑠 𝑌𝑒𝑎𝑟 1 + 𝑌𝑒𝑎𝑟 2 + 𝑌𝑒𝑎𝑟 𝑛
Depending on what is given, the following are the procedural
steps in computing for estimated cost of inventory and
inventory loss (e.g. caused by fire) :

1. Determine the Gross Profit Rate

2. Determine the Cost Ratio
Cost Ratio= 100% less Gross Profit Rate
3. Compute for the Net Sales (Sales less sales returns)
4. Compute for the estimated cost of goods sold.
Cost of Sales = Cost ratio x Net Sales
5. Compute for estimated inventory by using the following formula:

Merchandising Company:
Total goods available for sale XX
Less: Estimated cost of goods sold XX
Estimated ending inventory XX
Manufacturing Company - Finished Goods
Total goods availbale for sale XX
Less: Estimated cost of goods sold XX
Estimated ending finished goods inventory XX
Manufacturing Company - Work-in-Process
Total cost of goods placed into process XX
Less: Cost of goods manufactured XX
Estimated ending WIP inventory XX

Total direct materials availble for use XX

Less: Direct materials used XX
Estimated ending DM inventory XX
Manufacturing Company:
Estimated ending inventory, work in process XX
Less: Salvage or scrap value XX
Work in process inventories owned by the client but
not in the warehouse during the fire XX
Inventory fire loss XX

Manufacturing Company:
Estimated ending inventory, directly or raw materials XX
Less: Salvage or scrap value XX
Raw materials in transit(owned by the client) XX
Raw materials owned by the client but not in the
warehouse during fire loss XX
Inventory fire loss XX
6. Depending on what inventory was destroyed, compute for the
inventory fire loss:
Merchandising Company:
Estimated ending inventory XX
Less: Salvage or scrap value XX
Inventory out on consignment XX
Other inventories owned by the client not in the warehouse
during the fire XX
Inventory fire loss XX

Manufacturing Company:
Estimated ending inventory , finished goods XX
Less: Salvage or scrap value XX
Inventory out on consignment XX
Other inventories owned by the client but not in the warehouse
during fire XX
Inventory fire loss XX
 The record of Rafie Company for the year ended December 31, show the
following
Inventory, Jan 1 325,000
Purchases 1,150,000
Purchase returns 40,000
Freight in 30,000
Sales 1,700,000
Sales discount 10,000
Sales returns 15,000

On December 31, a physical inventory revealed that the ending inventory

was only P210,000. The gross profit on sales has remained constant a 30
percent in the recent year. Rafie suspects that some inventory may have been
pilfered by one of the entity's employees.

Compute what is the estimated cost of missing inventory on December 31?

Sales 1,700,000
Less:Sales returns 15,000
Net sales 1,685,000
Inventory , Jan 1 325,000
Add: Purchases 1,150,000
Freight-in 30,000
Less: Purchase returns 40,000
Goods available for sale 1,465,000
Less: cost of sales (70% x 1,685,000) 1,179,000
Inventory , Dec.31 285,500
Less: Physical inventory, Dec. 31 210,000
Cost of missing inventory 75,500
 -a simply pragmatic way of determining cost by starting with the
selling price and deducting a suitable estimate of the profit margin.
-is often used in retail industry for measuring inventories of large
numbers of rapidly changing items with similar margins for which it is
impracticable to use other costing method, for example, supermarkets,
department stores and other retail concerns where there is a wide variety of
goods.

Basic Formula

Goods available for sale xxx

Less: Net sales
Sales xxx
Less: Sales returns xxx xxx
Ending inventory at retail xxx
Multiply: Cost ratio xxx
Ending Inventory at cost xxx
 Procedural Approach
1. Compute for cost ratio using the following formula:
GAS at cost minus beg inventory at cost
FIFO = GAS at retail minus beg inventory at retail
GAS at cost
Average = GAS at retail

GAS at cost
Conservative =
GAS at retail excluding net markdowns
or
GAS at cost
GAS at retail add markdowns - markdown
cancellation
 Procedural Approach
2. Compute for the ending inventory at retail
Goods available for sale at retail xxx
Less: Net sales
Sales xxx
Less: Sales returns only xxx xxx
Ending Inventory xxx
3. Compute for ending inventory at cost
Ending inventory at cost =Cost Ratio/ending inventory at retail
4. Compute for the cost of sales
Goods available for sale at cost xxx
Less: ending inventory at cost xxx
Cost of sales xxx
 At cost only: COST RETAIL
Feight-in xxx
Purchase Allowance xxx
Purchase discount xxx
At retail only:
Summary of Mark-up xxx
items to be Mark-up cancellation' xxx
added(deducte Mark-down xxx
d to cost and Mark-down cancellation xxx
Normal Shrinkage, wastage xxx
retail Employee discount xxx
At cost and retail:
Beginning inventory xxx xxx
Purchase xxx xxx
Purchase return (xxx) (xxx)
Departmental transfer in xxx xxx
Departmental transfer out (xxx) (xxx)
Abnormal losses (xxx) (xxx)
 At cost only: COST RETAIL
Feight-in xxx
Purchase Allowance xxx
Purchase discount xxx
At retail only:
Summary of Mark-up xxx
items to be Mark-up cancellation' xxx
added(deducte Mark-down xxx
d to cost and Mark-down cancellation xxx
Normal Shrinkage, wastage xxx
retail Employee discount xxx
At cost and retail:
Beginning inventory xxx xxx
Purchase xxx xxx
Purchase return (xxx) (xxx)
Departmental transfer in xxx xxx
Departmental transfer out (xxx) (xxx)
Abnormal losses (xxx) (xxx)
Illustration: Retail Inventory Method
Presented below is information taken from Jeishan Company for the three months ended March 31.
Cost Retail
Inventory, Jan 1 179,600 200,000
Purchases 475,400 800,000
Purchase returns 50,000 80,000
Purchase discount 23,000
Purchase allowance 10,000
Freight-in 5,000
Markups 200,000
Markup cancellation 40,000
Departmental transfer-in 70,000 100,000
Departmental transfer-out 60,000 90,000
Abnormal loss 20,000 40,000
Markdown 115,000
Markdown cancellations 10,000
Sales 800,000
Sale returns 80,000
Sales allowance and discounts 120,000
Normal shrinkage 100,000
Required: Compute the ending inventory at cost and cost of sales assuming
1. Conservative Method
2. FIFO Method
3. Average Method
Solution: Retail Inventory Method
567,000 - 179,600
FIFO 52%
945,000 - 200,00
567,000
CONSERVATIVE 60%
945,000
567,000
AVERAGE 54%
1,050,000

Sales 800,000
Sale returns (80,000)
Sales allowance and discount ignored
Normal Shrinkage 100,000
Net sales 820,000

Goods available for sale at retail 945,000

Less: Net sales 820,000
Ending inventory at retail 125,000
 Solution: Retail Inventory Method

CONSERVATIVE FIFO AVERAGE

Ending Inventory 125,000 125,000 125,000
Multiply: Cost Ratio 0.54 0.52 0.6
Ending inventory at cost 67,500 65,000 75,000

GAS at cost 567,000 567,000 567,000

Less: Ending Inventory at
cost 67,500 65,000 75,000
Cost of sales 499,500 502,000 492,000
 When inventories are sold, the carrying amount of those
inventories shall be recognized as an expense in the period in which the
related revenue is recognized (often called cost-of-goods-sold).
Some inventories may be allocated to other asset accounts, for
example inventory used as a component of self-constructed property,
plant or equipment. Inventories allocated to another asset in this way
are recognized as an expense during the useful life of that asset.

FINANCIAL STATEMENT PRESENTATION

-Inventories are presented in a line item under “Inventories” in the current
asset section of Financial Statement
REQUIRED DISCLOSURES:
1. Accounting policy for inventories
2. Carrying amount, generally classified as merchandise, supplies,
materials, work in process, and finished goods. Classification depends on
what is appropriate
3. Carrying amount of any inventories carried at fair value less costs to sell
4. Amount of any write-down of inventories recognized s an expense in the
period
5. Amount of any reversal of a write-down to NRV and the circumstances
that led to such reversal
6. Carrying amount of inventories pledged as security for liabilities
7. Cost of inventories recognized as expense (cost of good sold)