INVENTORIES
Prepared by: Elaine Joy G. Claudel, CPA, MMBM
What are inventories?
Inventories are assets of an enterprise,
which are:
a. held for sale in the ordinary course of
business,
b. in the process of production for such sale;
or
c. in the form of materials or supplies to be
consumed in the production process or in
the rendering of services.
Classes of inventories
1. Inventories of a trading concern
- merchandise inventories
2. Inventories of manufacturing concern
- Finished goods inventory
- Goods in process inventory
- Raw materials inventory
- Factory supplies inventory
ITEMS INCLUDED IN
INVENTORIES
Based on definition, the following can be considered as
inventories:
Merchandise purchased by a retailer and held for resale
Land and other property of a real estate entity held for
resale
Finished goods produced by the entity
Materials and supplies awaiting use in the production
process
Items that may require special
attention in determining the proper
inventory items at the end of the
period
Goods in transit
- FOB shipping point/FOB origin/FOB seller – owned
by buyer
- FOB destination/FOB buyer – owned by seller
- Free Alongside (FAS) - ownership of the inventory
transfers from the seller to the buyer at the point when
the goods are placed alongside the vessel at the agreed-
upon port of shipment.
- Cost, Insurance and Freight (CIF) - ownership of the
inventory transfers from the seller to the buyer when the
goods pass the ship's rail at the port of shipment.
Items that may require special
attention in determining the proper
inventory items at the end of the
period (cont.)
Consigned goods – owned by consignor
Segregated goods (special order goods according to customer
specifications) – owned by the buyer if completed
Conditional sales and installment sales – must be excluded
from the inventory of the seller
Goods sold with buyback agreement – transferor shall retain
the inventory in its books.
Goods sold with refund offers (right of return) – must be
removed from the inventory at their carrying amount.
Lay away plans and bill-and-hold arrangement
Transactions Affecting Inventories
Transactions Effect
Purchases
Purchase returns
Received from consignors
Transferred to consignees
Sales
Sales – consignee
Sales returns – in good condition
Sales returns - unsalable
Inventory Accounting System
Differences Periodic Perpetual
Record keeping
Entities using the system
Recording of purchases on account
Recording of purchases returns
Recording cost of sales (every time a
sales transactions in made)
Cost of sales computation
Recording of cost of sales returns in
good condition
Physical count
MEASUREMENT
Lower of cost and net realizable value
(NRV)
NRV = Est. Selling Price – est. cost to complete – est.
cost to sell
COMPONENTS OF INVENTORY
COSTS
[Link] of Purchase - initial cost of acquiring inventory items.
[Link] of Conversion- expenses associated with transforming
raw materials into finished products.
[Link] of agricultural produce harvested from biological assets
[Link] Costs incurred in bringing the inventories to their present
location and condition.
Costs of Purchase
[Link] Price
[Link] Duties and Taxes
[Link] and Handling
[Link] Costs directly attributable to acquiring
finished goods, materials, and services.
[Link]
- Trade discounts, rebates, and similar items
are subtracted.
Costs of Conversion
[Link] Labor:
[Link] directly tied to the workforce involved in the
production process.
[Link] wages, salaries, and benefits of employees
working on the units of production.
[Link] and Variable Production Overheads:
[Link] Overheads: Consist of costs that remain
constant regardless of production levels
[Link] Overheads: Fluctuate with production levels
Cost of Agricultural Produce
Harvested from Biological Assets
Inventories comprising agricultural
produce that an entity has harvested
from its biological assets are measured
on initial recognition at their fair
value less costs to sell at the point of
harvest. (IAS 41 Agriculture)
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.
Examples of costs excluded from the cost of inventories and
recognized as expenses in the period in which they are incurred
are:
a. unallocated overheads
b. abnormal amounts of wasted materials, labor or other
production costs;
c. storage costs, unless those costs are necessary in the
production process before a further production stage;
d. administrative overheads that do not contribute to bringing
inventories to their present location and condition;
e. selling costs.
f. Foreign exchange differences arising directly on the recent
acquisition of inventories invoiced in a foreign country.
When to recognize inventory as an
expense?
When inventories are sold
When inventories are written-down to
net realizable value
When inventory are lost due to fire,
flood, theft and other forms of
casualties.
COST FORMULAS
Specific Identification
FIFO
Weighted Average
