ee After reading this chapter, you should be able to: 1. describe the nature of inventories; 2. identify the items and costs included in inventories; 3. account for initial recognition of and subsequent transactions affecting inventories using both the perpetual inventory system and. periodic inventory system; compute inventory cost using the different inventory costing procedures; evaluate the effects of inventory. costing methods for both “financial reporting and tax reporting; ‘analyze the effects of inventory errors on current and future “financial statements; measure inventories based on the lower of cost and net realizable value; Koidiite ihe cost off Iroentories. using the opnaenaal estimating procedures; and identify information relating to inventories required to be disclosed in the financial statements. Introduction One of the biggest challenges of an enterprise is to maintain the appropriate volume of inventories and control its cost of sales. One businessman states that success in business is more than good products; iesess depends on assigning and monitoring costs of inventory and applying sound inventory management procedures. NATURE OF INVENTORIES As described in International Accounting Standards (IAS) 2, aragraph 6, inventories are assets of an enterprise, which are held for sale in the ordinary course of business; in the process of production for such sales; or in the form of materials or supplies to be consumed in the — production process or in the rendering of services,e nature of the business determines the d » For a manufacturing concern, inventories ‘Goods, Goods in Process (or Work in Process) and) ile for a trading or merchandising concern, the goods that. exactly the same form as they are bought are termed as Inventory or simply Inventory. Finished Goods Inventory includes the completed products awaiting sale and contains the same cost components @ goods in process inventory. Goods in Process (or Work in Process) Sect of raw materials, direct labor and manufacturing ovesiaaag for products that are partially completed at the end of a period. Biieais Inventory includes the tangible goods, Bequila manufacturing concern for use in the production proc COST OF INVENTORIES The cost of inventorie of conversion and other cos present location and conditio Costs of Purchase ries includes the purchase pF srt, handling and other ¢ s, materials The cost of purchase of import duties and other taxes directly attributable to the acquisition services. Trade discounts, rebates and other determining the costs of purchase. (IAS 2, Inventories, paragrap! Costs of Conversion ‘ ‘The costs of conversion of inventories include costs directly to the units of production, such as direct labor as well as an allo fixed and variable production overhead, which were incurred in ‘materials into finished goods. Fixed production overheads indirect costs of production that remain relatively constant regard of production, such as depreciation and mainte and equipment and the cost of factory Variable production overheads are vary directly, or nearly dProduce Harvested from Biological. ventories comprising agricultural produce that an ent sted from its biological assets are measured on initial recognition fair value less estimated cost to sell at the point of harvest. (IAS 4 Agriculture) 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. Exclusions from Cost of Inventories The following costs are excluded from the cost of inventories. They are recognized as expenses in the period in which they are incurred Abnormal amounts of wasted materials, labor, or other production costs Storage costs, unless those costs’ are necessary in the production process prior to a further production stage Administrative overheads that do not contribute to bringing inventories to their present location and condition Selling costs (IAS 2, Inventories, paragraph 16) Labor and other costs relating to sales and general administrative personnel Profit margins or non-attributable overheads that are often factored into prices charged by service providers (IAS 2, Inventories, paragraph 19) Financing element involved in purchases under deferred payment arrangement (IAS 2, Inventories, paragraph 18). In general, borrowing costs incurred in connection with inventory acquisition are recognized as finance costs. These include borrowing costs incurred to purchase merchandise inventory and borrowing costs attributable to inventories‘Trade and Cash Discounts Similar to the seller's viewpoint discussed in Chapter 9 p of Volume 1 of the Intermediate Accounting series, the purchas, recorded net of trade discounts, while cash discounts may b using one of the following methods: the gross price metho method, and allowance method. Under the gross price method of recording purchases, the py is recorded at the gross amount and a Purchase Discount is when payment is made within the discount period. Purchase Di generally reported as a deduction from gross purchases to artive at qu purchases. " Under the net price goods, net of cash discounts. The discount is recorded only if it is taken; that is, when payment is made after the discount period, discount not taken is recorded in Purchase Discounts Lost or Interest Expense account, whi jorted on the Income as a finance co Under the allowance method, purchases are recorded at net prHicess and accounts payable at gross prices, with the difference debited to/aniy allowance account. ‘Theoretically, the net price method producessiiem correct inventory cost, ic, invoice cost less all available discountss) Purchase Discounts Lost should be treated as a financing expense for they) period and should not be added to the cost of inventory.? ITEMS TO BE INCLUDED IN INVENTORY QUANTITIES The basic criterion for including items in inventory is economic control rather than physical possession. For inventory, economic controls usually consistent with legal ownership. For convenience and practicalifj; goods are recorded in inventory when received by the purchaser recorded as sold by the seller when shipped. When financial statements are prepared, however, all goods under economic control of the enterP! shouldbe included in inventory whether or not the company has physica or legal possession of these goods. Some examples are goods in tra _ IAS 23 Borrowing Costs provides guidance for capitalization of borrowi ‘See chapter 2 of this book for a more detailed discussion. oa * For an illustration of the entries under the gross method and net metho hapter 5, Financial Liabilities, Volume 1 of the Intermediate Accounting S® peaae eS aesGoods in Transit Normally, some inventories are in transit to the company or its customers at the reporting date. When goods are in transit at the end of the reporting period, the terms of shipment determine whether the seller or the buyer includes them in its inventory. If the goods are shipped FOB (free on Board) shipping point, legal title to (and economic control of) the goods passes with the loading of goods at the point of shipment. The buyer should include these goods in its inventory and a corresponding liability is recognized. In addition, freight cost under FOB shipping point is for the account of the buyer. If, however, the seller prepays for the shipping cost (termed as FOB shipping point, freight prepaid), freight cost is added to the amount receivable from the buyer (or amount payable to the seller) If goods are shipped FOB destination, legal title (and control) is not transferred until the goods are delivered to the buyer’s destination. Physical receipt of the goods by the buyer normally determines: when it should record the inventory in its accounting system. Freight cost under FOB destination is for the account of the seller. If, however, the buyer paid the shipping cost upon receip: ‘ods (termed as FOB destination, freight collect), freight cost is deducted from the amount payable to the seller (or amount receivable from the b To illustrate, assume that ABC Company purchased goods costing 'P100,000 from XYZ Corporation. Freight cost is P10,000. Further assume that both companies use periodic inventory system. If goods were shipped FOB shipping point and XYZ Corporation paid the freight cost of P10,000, journal entries in both books are: ABC Company (Buyer) XYZ Corporation (Seller) Purchases 100,000 Accounts Receivable 110,000 Freight-in 10,000 Sales 100,000 Accounts Payable 110,000 Cash 10,000 If the goods were shipped FOB destination and ABC Company paid the freight cost of P10,000, journal entries are: ABC Company (Buyer) XYZ Corporation (Seller ases 100,000 Accounts Receivable 90,000 counts Payable | 90,000 Freight-out 10,000‘Terms of Shipment Seller, FOB shipping point Exclude FOB destination Include In international business, other terms used for shipment of g include “Free Alongside (FAS)’ and “Cost, Insurance and Freig Free alongside means that the risk of loss shifts from the seller to the'b at a named port alongside a vessel designated by the buyer. CIR, ont other hand, means that the seller arranges for the delivery of goods by to a port of destination. The seller also provides the buyer wait documents necessary to obtain the goods from the carrier. Consigned Goods Goods may be transferred from one party to another for purposesk sale without the ownership and ultimate economic control changing hand The company delivering the goods, called consignor, retains) ownership while the company receiving the goods. consignee, attempts to sell: them. If the goods are sold, the consignee earns a commission and remits: the net amount to the consignor; whereas if the goods are not sold, they are} returned to the consignor. : The goods must be included in the inventory of the consignor, at cost, plus the handling and shipping costs incurred in the delivery of the goods to the consignee. The consignee, acting as an agent, does not Own, the goods; hence, neither the peso amount of the consigned goods nor tht financial obligation for such goods is reported on its financial statementss) In summary, the consignor includes goods out on consignment in its iniventory while the consignee excludes goods held on consignment in its” inventory. 3 Segregated Goods __ Special order goods manufactured according to custo specifications, even if still in the possession of the selling company, sht be considered as sold when completed, and therefore excluded from selling company’s inventory. The rationale for this treatment is that, manufacturer undertakes and completes the processing of the goods | on the order and specifications by the customers. Thus, at the pt completion, revenue is considere therefore, be recognized. @. to pave best aaa eeDespite retention of title by the seller under the installment contract, the substance of the transaction is that control over the goods has already passed to the buyer. The seller anticipates completion of the contract and the ultimate passing of title, and therefore recognizes the transaction as a regular sale. The seller removes the goods from the reported inventory at the time of sale. The goods are recorded as sold when. delivered and excluded from the inventory of the seller. Other merchandise owned by an enterprise but in the possession of others, such as goods in the hands of salespersons and agents, goods held by customer on approval and goods held by others for storage, processing or shipment, should also be shown as part of the ending inventory of the enterprise that economically controls the goods. Goods Sold with Buyback Agreement A buyback agreement, accompanying sale of goods, is in substance, a form of product financing arrangement. The owner of the goods sells the inventory to another party and agrees to repurchase the goods at a Specified price, which covers all costs of inventory plus related holding costs. In effect, the inventory is used as collateral for a loan obtained either directly from the buyer, or from a financing company with the buyer as intermediary. In such the customer does not obtain control of the asset (the inventory), and the transferor shall account for the transfer {sa financing arrangement and shall retain the inventory in its books. Any consideration received from the transfer shali be credited to a financial liability (based on pars. B66 and B68, IFRS Goods Sold with Refund Offers In some instances, buyers are given the right to rescind the purchase of goods for a reason specified in the sales contract. To account for the transfer of products with a right to return, an entity shall recognize (a) revenue for the transferred products (at the amount of the transaction Price), (b) a refund liability, and (c) an asset for its right to recover the Products from the customer on settling the refund liability (pars. B21 to B25, IFRS 15 Revenue from Contracts with Customers). The recognition of _Tevenue implies that the pea once transferred goods be removed fromLay Away Plans and Bill and Hold Sales .g sales promotion scheme, lay away. ‘Under this scenario, the customer fraction or a portion of the selling price of nee i = t Been or pay the fall amount a 5 ‘i uner only upon full payment of the goo ae Or delivers to customer only WPT oa coat As part of an entity’ being offered to customers. 2 in ‘This is similar to bill-and-hold sae cesion of that product until it j pb. PI Product but retains PHYS" ya point in time, for example ay transferred to the cust a puit a substantial portion of the goods customer has already made payments of @ a selling price: a eis ized when th se cireumetances, revenue is recognize . Under these cirivver the product, that is, when the following a3 customer obtsins Corre. (a) the product must have Beem Idi conditions have Der jelonging to the customer; (b) the produc Saag separately #8 already Dc stomer; (c) and the entity does not Hale Sei ae ready for transfer to Te Crit to another customer (based on pars. Baim r use the product or to direct it 1 yt venue is made simultaneous {0 ee t inting records £Y derecognition of inventory in the seller's a 2 bo ¥STEMS ey sunted for using either or Periodic System A company using the periodic system, also called as physical system, does not maintain a continuous record of the physical quantities {or costs) of inventory on hand. Therefore, the company will not Be able to Setermine its inventory accurately until a physical inventory is taken atthe end of the period. At that time, the following computation, is used to determine the cost of goods sold of a merchandising concern: an in Merchandise Inventory, beginning Add net cost of purchases xx Cost of goods available for sale Poe in Less Merchandise Inventory, end xx R Cost of Goods Sold Pxx fr ° Under the periodic system, all acquisitions of inventory are charged PD: to a nominal account Purchases. Separate accounts are usually maintain’ ir for purchases returns and allowances, purchases discounts, and freight Net cost of purchases is the sum of purchases and freightin reduced purchase discounts, returns, and allowances.Pro-forma entries Purchases Accounts Payable/ Cash b. Purchase returns Accounts Payable/Cash xe Purchase Returns ¢, Sale of goods Accounts Receivable/Cash Sales d. Sales returns Sales Returns ae Accounts Receivable/Cash e, Year-end entry to set up Merchandise Inventory, end xx ” ending inventory Income Summary f, Year-end entry to close beginning inventory Merchi 2c Alternatively, the entry to set up ending inventory and to close beginning inventory may be made simultaneot setting up cost of sales for the period. Such year-end entry Merchandise Inv Cost of Sales Purchase Returns and A Purchase Discoun Freight In xx Merchandise Inventory, beginning xe Purchases xx The periodic inventory system is appropriate for relatively low value, but numerous inventory items, particularly when the costs of a perpetual inventory system are likely to outweigh its benefits. ‘ Enterprises presenting expenses on the statement of comprehensive _ income according to nature neither computes nor sets up cost of sales. _ Rather, the net cost of purchases (adjusted for the change in inventories from the beginning to the end of the period), is shown among operating ses classified according to nature. Thus, no cost of sales and gross are presented. In such a case, the entry to set up the ending‘The beginning inventory is brought to 7er0 balance in closing the books, with this entry: Income Sumnard ge Inventory, beginning Faiiie;pront or loss secon of the statement of comprehes ture, the Balance of the i enses according to nature, Be ei ccaang i ng vento wil be soan a Pxx xx Pax Net sales revenue Other income Total income Operating expenses Net purchases (Increase) Decrease in inventory Salarie Depreciation Other operating expenses Total operating expenses Profit before interest and income tax Perpetual System ‘A company using the perpetual maintains a continuous record of the movement of the items in ventory Such a system is essential when management want to maintain effective planning and control over inventory. Companies maintaining inventory items in smell quantities with high unit costs usually adopt this method. The purchase) or production, and use of each item of inventory are recorded in detailed subsidiary records either in units only, or in both costs and units. A retail firm that uses a perpetual inventory system and records the cost 07 inventory transactions would prepare the following journal entries. Transaction Pro-forma entries a. Purchase of goods Merchandise Inventory Accounts Payable/Cash b. Purchase returns Accounts Payable/Cash Merchandise Inventory c. Sale of goods Accounts Receivable/Cash Sales Cost of Sales Merchandise InventorySales Returns 2 Accounts Receivable/Cash Merchandise Inventory Cost of Sales At the end of the reporting period, because the inventory account is “updated, no adjusting entry is necessary to set up ending inventory. - The perpetual system has the advantage of providing inventory information on a timely basis but requires the maintenance of a full set of inventory records. For internal control purposes, a physical count is made fat least once a year, but not necessarily at year-end, to confirm the inventory balance per books. Variation between the physical count and the ledger balance may result from errors in recording, shrinkage, waste, breakage, theft, and other causes. The cost of the difference in the two quantities is entered into the accounts to bring the perpetual records into agreement with the physical count. Any excess of the balance of the inventory control account over the physical count, if due to normal causes, such as shrinkage and breakage, is debited to cost of sales (using the function of expense method) or may be Gebited to Inventory Shortage (using either the function of expense method or nature of expense method). 2 in the Inventory Shortage account is presented as other ope: e ses in profit or loss section of ithe statement of comprehensive income. If the excess of inventory control laccount dver the physical count is due to theft, a separate loss account is charged. COST FORMULAS A primary issue in accounting for inventories is the determination of the amount to be recognized as an asset and the amount to be recognized as expense. IAS 2, Inventories, prescribes that inventories are reported in the statement of financial position at the lower of cost and net realizable value. IAS 2 also provides guidance on the determination of cost and its Subsequent recognition as an expense including any write-down to net Tealizable value as well as cost formulas that are used to assign costs to tories. _ The cost of goods available for sale is allocated between the cost of ds sold and the ending inventory by means of a cost flow assumption. — 1 flow of goods does not need to match the assumed flow ¢ r financial statements. iine cost of inventory items that ly in Reeteined ‘using the specific identification meth a {dentification of cost means that specific costs are a sibute Remierer mventory. This J the appropiate te tment for Segregated for a specific Project regardless = ought or produced. ‘This method requires @ mean® of identifying the historical tasty Boch unit of inventory up to the time of sale. With this method, the fg Be locts matches the physical flow of goods; thus, assuring an exag matching of costs and revenues. Inventory items that are ordinarily interchangeable rhe cost of inventory items that afe ordinarily interchangeable ig) emeniced’ using either the firet-in, first out method or the weighted average method. FO) - {FO method of costing inventoryis)™ based on the assumption that costs should be charged against revenue in| tiie bider inwhich they were incurred. Hence, the inve nity remaining is measured based on the most recent cc An appropriate measurement of inventory is achieved under this me secauise the ending inventory 1s) reported at the approximate replacement Meanwhile, it will be observed that there is no pro a sost against revenue since earliest (old) costs are matched to ues. ‘The FIFO periodic and the FIFO perpetual methods result ai Mig same inventory cost because the goods are assumed to be sold in the seis sequence that they were acquired. Compared with other costing formule in periods of rising prices (inflation), FIFO reports the lowest cost of goad sold and the highest amount of ending inventory and profit, whereas ii ei easing prices (deflation), FIFO reports the highest cost of ¢ lowest amount of ending inventory and profit. Weighted Average - This method considers goods to Bey undistinguishable and are, therefor . e, valued a 1 peeitred. alued at an average of the costs Moving average method (perpetual system). This method requires @ computation of new unit cost after 8 each issue RH Sitar the tent aveage Unit caters es a oben Weighted average method (periodic system). Under the weight average cost formula, the cost of each it H itel i i average of the cost of similar itera at the beg seccnntied oa of similar items purchased or produced during the period. ginning of a period and the cos!IAS 2, Inventories does not permit the use of the last-in, first-out: {LIFO) formula to measure the cost of inventories. Under the LIFO method, the cost of the most recent purchase is charged to cost of sales; hence, the cost of inventory is based on the cost of the earliest acquisitions. Illustration of the Inventory Cost Allocation Methods/Cost Formulas The inventory records of ABC Merchandising showed the following, data relative to a particular item sold regularly. (Assume transactions in the order given) Trans 000 . Purchases 000 Sales (at P130 per unit) 000 Purchases 6,000 Sales (at P135 per unit) 6,000 . Purchases 3,000 Determine the cost of ending inventory, cost of goods sold and gross: Profit under each of the following methods. Specific Identification Method (Sales of No. 3 originated from the purchase of No. 2; while sales of No. 5 originated from No. 2 (11,000 units) and No. 4 (5,000 units). FIFO Method Weighted Average Method Moving Average Method | From.No.1 2,000 x P50 From No.4 — 1,000 x P55 : 3,000 x P60a Cost of goods sold No.3 sales 7,000 x P52 No. 5sales 11,000 x P52 5,000 x P55 Total cost of goods sold Gross profit Sales 7,000 x P130 16,000 x P135 Less cost of goods sold Gross profit PIFO Periodic Method Cost of ending inventory : Most recent cost (3,000 units @ P60) P180,000 » Next most recent cost (3,000 units @ P55) _165,000 Total cost of ending inventory P345,000 Cost of goods sold Cost of goods available for sale 2,000 x P50 100,000 18,000 x P52 236,000 6,000 x PSS 330,000 3,000 x P60 180,000 _P 1,546,000 Less cost of ending inventory 345,000 Cost of goods sold P1,201,000 Gross profit Sales P3,070,000 Less cost of goods 01,000. Gross profit 1,869,000 FIFO Perpetual Method [Transaction Received Tesued Balance 2 e 2 | 18000 s5=536 000 2000-4 $0 = 100-000 a 18,000 @ 52 2,000 @ 50= 100,000 | 13,000 @ 52 5,000 @ 52= 260,000 a 6,000 @ 55 = 330,000 13,000 @ 52 Ld 6,000 @ 55 13,000 @ 52> 676,01 000 @ aa 000 | 3,000@ 55 3,000 @ 60 = 180,000 3,000 @ 55 3,000 @ 60 Inventory, encAverage Method (Periodic) Cost of ending inventory Total cost of goods available for sale 1,546,000 Total units available for sale 29,000 units = P53.31 average cost per unit x 6,000 units on hand P_319,860 Cost of goods sold Cost of goods available for sale P1,546,000 Less cost of ending inventory 319,860 Cost of goods sold P1,226,140 Gross profit Sales P3,070,000 Less cost of goods sold 1,226,140 Gross profit P1,843,860 Moving Average Method (Perpetual) A stock card is prepared as follow Received | issued 18,000@52=936,000 | 6,000@55=330,000 3,000@60=180,000 | ~6,[email protected] The procedures for the maintenance of the stock card under the Moving average method are as follows: The number of units and total cost of the goods received are added to the previous respective balances to derive the new number of units on hand and the total cost of goods on hand. The moving (new) average unit cost is determined by dividing the total cost by the total number of units. Thus, the 18,000 units purchased, in transaction 2, plus 2,000 units previously on hand equals 20,000; P936,000 cost of purchases of 18,000 nits is added to the cost of the previous inventory, P100,000; > Sum is 1,036,000. P1,036,000 is divided by 20,00 to a moving average unit cost, after transactiThe number of units previous units on Rete the issue. § on hand after 175 gqued x the average Unk cost before number of un! 1 cost of goods on ious total fy deducted from the previ a ‘cost remains ne achanged, (Thus; 7,000 nee 19362,600 and P1,036,000 — 362,600 = P673,40( 3,000 units 51.80.) er transaction 6, is the last figure in P_338,440 the cost of ending inventory aft the balance column the cost of goods sold is the total cost in the issued column, ie P1,20' Ho" 362,600 + P844,960 P1,207,560, Hoe down OSS fit Se caies 3,070,000 ae Less cost of goods sold _1,207,560 vi Gross profit P1,862,440 value MEASUREMENT OF INVENTORIES ae RECOGNITION SUBSEQUENT TO INIT! of financial position, should Be ue. Cost is determined) as discussed in Inventories, in the statement measured at the lower of cost and net realiza| by applying the specific cost formula used nterp! fe meveding section. Net realizable value is defined as. the estimated Gating price in the ordinary course of business less the estimated. eOais of mated costs necessary to make the sale, completion and ‘The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may not also be recoverable if the estimated costs of completion or the estimated costs to Be incurred to make the sale have increased. The practice of writing ener cor ao cost to net realizable value is consistent with the os ets should not be carried in excess of amounts expected to BE alized from their sale or use. (IAS 2, Inventories, paragraph 28) Invi ‘ te, aes sua ar atrs down to net realizable value on af poe: mstances, howeve to group simil: ances, ever, it may be appropriate een Va tate te ase with items of | inventory relating fo the etme product line that have similar purposes or cannot be practicably ted in the same geographi 1d practcably evaluated separately from other items i that produet line, It is not appro ; priate to write i : classificatic inventories di si f elssifcation of nventony, or example, finished oe eae a dadustioy of peceeaohi caine or all the inventot ‘paragraph 29) egment. (IAS 2, Inventorprice as well as the purpose for which the inventory 4 the net realizable value of the quantity of inventory, ‘m sales or service contracts is based on the contract prices 7B wtracts are for less than the inventory quantities held, the value of the excess is based on general selling prices. (IAS 2; ” ies, paragraph 31) es Materials and other supplies held for use in the production of “inventories are not written down below cost if the finished products in iihich they will be incorporated are expected to be sold at or above cost. However, when a decline in the price of materials indicates that the cost of The finished products exceeds net realizable value, the materials are written down to net realizable value, In such circumstances, the replacement cont Githe materials may be the best available measure of their net realizable value. (IAS 2, Inventories, paragraph 32) To illustrate the application of the lower of cost and net realizable alue rule, assume the following information for different inventory items held by XYZ Company at December 31, 2019: Cost Selling Expense _Units 185.00 35.00 5,000 69.00 a 30.00 20,000 31.00 : 15.00 15,000 75.00 5.0 37 18,000 The total cost of inventory is det: A 5,000 x P185.00 B 20,000 x P 69.00 C€ 15,000 x P 31.00 D_ 18,000 x P 75.00 350,000 Total 4,120,000 The inventory value is determined as follows: NRV (SP= Lower of Total selling Inventory Cost expense) Value A Pi85.00 P195.00 P_ 925,000 69,00 70.00 . 1,380,000 31.00 28.00 ; 420,000 75.00 68.00 1,224,000 [value of inventory100 to total value of i ‘Thus, from total cost of P4,120.0 : lower of cost and net realizable value of P3,949,000, there is in down amounting to P171,000- Write Down of Inventory ‘The amount of any write-down of inventories to net realizable should be recognized as an expense i” the period the write down oceurs, ce ogra of inventory. cost to lower 02 and net r value may be recorded using either direct method or allowance m¢ Some entities find the allowance method more convenient to adopt si the method uses a separate valuation ac’ sunt and a separate loss account, ‘and the effects of the write-down ‘and its subsequent recovery can be clearly) identified in'the entity's statement of comprehensive incom: Assume the following data for ABC Merchandising, ‘The company — uses periodic system and first-in, first-out method of cost allocation. 12/31/201 12/31/2018 12/31/2019 Cost 500,000 520,000 'P600,000 Lower of cost and NRV 480, 490,000 575,000 Direct. +(| ~~ Allowance ci Method. To record ending inventory | Inventory 480,000 Income Summary | To record inventory at lower of cost | and NRV Loss from Decline in NRV of | Inventory ‘Allowance to Reduce Inventory | to NRV December 31, 2018 To close beginning inventory Income Summary 480,000 Inventory 480,000 To record ending inventory Inventory 49 Income Summary Song 490,000. | Te record inventory at to rNRV uy wer of costTo close beginning inventory Income Summary 490,000 Inventory 490,000 To record ending inventory Inventory 575,000 Income Summary 975,000 To record inventory at lower of cost and NRV Allowance to Reduce Inventory to NRV Recovery in NRV of Inventory 5,000 Assuming the same information, but the company uses the perpetual inventory system, journal entries to reflect the valuation at th lower of cost and net real Allowance: ___ Method December 31, 2017 Cost of Goods Sold | Inventory 20,000 | Allowance to Reduce Inventory Loss from Decline in NRV of Inventory | to NRV December 31, 2018 | Cost of Goods Sold Inventory Loss from Decline in NRV of Inventory Allowance to Reduce Inventory‘Chapter 1 - Inventories Aiiowance to Reduce Tnventory | to NRV Recovery in NRV of Inventory ae \ Presentation in Profit or Loss tory to lower of cost and) *T atement of comprehensiag ‘The effects of adjustini Merchandising and the other come the foregoing illustratior resent the effects of the Ree pie 019 2018 ),000 P3,000,000 Sale ),000 1,800,000 750,000 Direct Method entories are — ie value in the compt f ial | P 480,000 a 1,800,000 a P 2,280,000 hay 490,000 IGcak of goods sold 10 P.1,790,000 The profit is computed a: 2019 2018 Sales P3,500,000 P3,000,000 Cost of goods sold 1,790,000 Gross profit P1,210,000 General and administrative expenses 750,000 Profit P_460,000 The inventories are reported directly at the lower of cost and met realizable value; hence, the decline in net realizable value is absorbed BY} the cost of goods sold. Other than cost of good sold, no other line item relating to decline in (or recovery of) net realizable value of inventory presented on the face of the profit or loss. op’ P F a ¢ sare measured at cost in the computation of 3 adjustment in the balance of the allowance is presented as of! (recovery) or other operating expenses (decline) in profit or loss. _ 2019 2018 iter the ellpwance wethad’ bot the tb ‘of goods sold: Beginning inventory P 520,000 P 500,000 Purchases 2,000,000 __ 1,800,000 Total cost of goods available for sale P2,520,000 P.2,300,000 Ending inventory 600,000 ___520,000 Cost of goods sold Pi,920,000 P.1,780,000 The profit is computed as follows: 2019 201 Sales P3,500,000 — P3,000,000 Cost of goods sold 1,920,000 1,780,000 Gross profit P1,580,000 1,220,000 Recovery in NRV of inventory 5,000 - General and administrative expenses (850,000) (750,000) Loss from decline in value of inventory wh (10,000) Profit 00 + P_460,000 It will be noted t ost of goods sold differ but the operating profits are the same under the two methods. OTHER INVENTORY ISSUES Purchase Commitments Companies often contract with suppliers to purchase a specified quantity of materials during a future period at an agreed unit cost. This is Usually done to lock in prices and insure’ sufficient quantities. Purchase “Commitments may be subject to revision or cancellation before the end of the contract period. Other purchase commitments, however, are non- Saneelable and are not subject to revision. A disclosure in the notes to financial statements is required for a € contract subject to revision or cancellation if: (1) a future loss is # (2) the amount of the commitment can be reasonably estimated; the amount is material. The note disclosure gives the relevantthapter_1 Inventories Mrs ayusteste, assume that of Oe ia : Peniectietabfe commitment to purcnase 10007 ai of an it P10 each, six months after date. O7 Deeg 51 20m purchase price of the inventory item 1 9.00 per unit Bea F7100,000 [1.00 x 100,000 units) is recorded on DEST 1, 2019 a S 100,000, Loss on Purchase Commitments | Estimated Liability on Purchase Commitments che de on April 1, 2020, the ay When the actual purchase is mat ; purchase price of the inventory item decreased further to P8.50 per The purchase is recorded as 850,000 Purchases a Ke Loss on Purchase Commitments _ 5000 Estimated Liability on Purchase Commitments 100, ‘Accounts Payable 1,000,000 ithe loss is thus assigned to the period in which the Gssiaaiiiig™ place. It is reported on the statement of comprehensive 19c2s among the bperating expenses while the estimated liability on purchase commitments is reported on the st nt of finar ion as a current liability. When there is a ful ar covery of the purchase price, the recovery would be recogt rn © period during which the | recovery takes place. T he average price at April 1, 2020i8 7 9.25 per unit, the purchase entry would t lows: 4 Purchases 925,000 Estimated Liability on Purchase Commitme 100,000 Accounts Payable 1,000,000 Recovery of Loss on Purchase Commitments 25,000 Recovery of loss on purchase commitments is reported om the | Statement of Comprehensive Income as other operating income. amount of recovery that is taken up, however, is limited to the 1089 recorded in the previous period for the same purchase commitment. INVENTORY ESTIMATION METHODS. When inventory items cannot be physi % because the goods may have been damaged o a eee ea as fire or flood, or when the inventory or cost of goods sold would presented in the interim financial statements such that a complete phys! count may be too impractical, or to validate inventory figures determ through physical count, the value of inventory may be determined estimating procedure. There are two common ean ‘ds of ai cost of inventory: the gross profit method and the retail iene r‘The gross profit method depends on the accuracy of the gross profit — That accuracy may be enhanced by adjustments for known in the relationship between gross profit and sales or between gross and cost of sales and varying gross profit rates in different artments or types of inventory. ‘The calculation of inventory under this method is as follows: Beginning inventory ‘Add net purchases Cost of goods available for Less estimated cost of g (a) Gross profit rate is based on s Net sales x (100% - GP rate) (b) Gross profit rate is based on cost Net sales = (100% + GP rate) ax Estimated cost of ending inventory Pxx The amount obtained is repe 4s ending inventory for interim financial reporting purposes or is co he amount of lo fire, flood, theft, and similar events w damaged merchandise. in cases of here are undamaged or partially To illustrate, assume the following figures for RME Company for the “sixmonths ended June 30, 2019 Inventory, January 1, 2019 P 500,000 Purchases 2,000,000 Sales 3,000,000 Purchase returns 80,000 Purchase discounts 5,000 Sales returns 60,000 Sales discounts 4,000 mine the estimated cost of June 30, 2019 inventory assuming that theChapter _1 - Inventories Inventory, January 1, 2019 . ‘Add: net cost of purchases 2,000,000 Purchases (80,000) Purchase returns (5,000) 1,915,009 5 ASE 915,000 Purchase discounts 000) 1,2 15.000 Total dost of goods available for sale P 2,415,000 as eaat et Jane 90, 2019 inventory is further computed under the e cost of June 3 two assumptions as follows ia) 8 GP rate is GP rate is 25% based 25% based on on sales cost of sales Total cost of goods available for sale 2,415,000 2,415,000 Estimated cost of goods sold 2,940,000 x 7 2,940,000 + 125% Estimated cost of ending inve 2,205,000 > 210,000 For purposes of computing co: available for sale, both purchase returns and purchase discounts, as welll as freight in, if any, are taken into cofisideration. The reason is tha’ net cost of purchases is actually experienced or incurred before s¢ p the sales price. However, for purposes of computing the cost of goods sold using tie gross profit method, net sales is computed by deducting sales returns only Thus, in the illustration given, the net sales of P2,940,000 is computed 48 3,000,000 sales less P60,000 sales returns. The sales discounts of P4,000 was simply ignored. Sales discounts a .s allowances are normally disregarded in computing net sales, because they do not involve physical flow of merchandise back to the company. However, in some exceptional cases, when sales discounts are significant and the company anticipates these discounts in setting sales prices, sales discounts may be considered: compu een there is undamaged or partially damaged merchandise, mputation of inventory loss is further continued as follows: Estimated cost of ending inventory Less: Cost of undamaged inventory Realizable value of partially damaged 3 inventory (but not to % Estimated inventory loss exceed cost) Pxx| pig flood caused severe damage to the w On November 30, 2019, @ farchouse of ABC Merchandising Company. The company suffered a significant toss on its merchandise Coontory. The following information was available from the accounting tecords of ABC Merchandising Company’ To illustrate, assume the following data. January 1, 2019 to date of flood 2018 Merchandise Inventory, beg. P 200,000 P 5 Purchases 1,190,000 1,120,000 Purchases Returns 30,000 20,000 1,560,000 1,200,000 Sales [At the beginning of 2019, the company changed its, policy on, the selling prices of the merchandise in order to produce a gross Pron Tale of $% higher than the gross profit rate in 2018. Undamaged merchandise marked to sell at P50,000 and damaged Trerchandise marked to sell at P15,000 were salvaged. The damaged rerchandise had an estimated realizable value of P4,000 REQUIRE! nventory lost from the Determine the es flood on Noven Solution: c 018, then followed by the Step 1. Compute th gross profit rate for year 2¢ Cost of goods sold = 1,120,000 - 20,000 - 200,000 = 900,000 Gross profit = 1,200,000 - 900,000 = 300,00 Gross profit rate (2018) = 300,000/ 1,200,000 = The company increased its gross profit rate by 5% in 2019. Therefore, gross profit rate in 2019 is 30% (25% + 5% Step 2. Compute the estimated cost of merc handise inventory at the time of flood. i Merchandise Inventory, January 1, 2019 P 200,000 ‘Add net purchases (1,190,000 - 30,000) 1,160,000 Cost of goods available for sale P1,360,000 Less estimated cost of goods sold 1,560,000 x (100% - 30%) 1,092,000 Estimated cost of inventory, November 30 P_268,000 25‘Chapter 1 - Inventories Step 3. Compute the estimated cost of merchandise inventory Jog the flood. Bstimated cost of inventory, November 30 P 268,000 Less: Cost of undamaged merchandise (60,000 x 70%) (85,000) Estimated realizable value of damaged merchandise” (4,000) Estimated inventory lost from flood 229,000 aged merchandise is P10,500 (70% x P15,009 Ane amount deducted, however, is the estimated realizable: valui Raia Jager than cost. If the realizable value is higher than the cost of damit Hrerchandise, the amount deducted is the lower amount (coat) Other than estimating inventory loss due to catastrophe, the grosy profit method is also useful for validating the amount “of magia Pefermined by physical count and for valuing inventories and cost GRaaiaig sold for interim reporting pur However, the gross profit method of estimating inventory is not all for annual external financial reporting purposes. “The cost of dam: 20) some f Retail Inventory Method The retail method is often used in the retail industry for measuring inventories of large numbers of rapidly ems with similar margins for which it is impracticable to use ot methods. The cost of the inventory is determined by reducing th of the inventory by the appropriate percentage gross margin. The percentage used takes into » consideration inventory that has been marked down to below its original élling price. An average percentage for each retail department is often used. (IAS 2, Inventories, paragraph 22) The retail inventory method requires the maintenance of records of purchases at both cost and selling price. A ratio of cost to retail is calculated and applied to the ending inventory at retail to: compute the approximate cost. When using the retail inventory method, the appropriate treatments Mlustr for freight, discounts, returns and allowances, and other relevant items 4T@ as follow: a, _Freight-in is an addition to purchases at cost. Purchase discounts and purchase allowances are deductions from purchases at cost only. Purchase ‘returns are deducted from the cost and retail amounts of purchases. Sales returns are deducted from retail sales. 26Sales discounts and sales allowances are not deducted fro retail sales 4 Departmental transfer-in (debit) is an addition to both cost and retail amount of purchases. Departmental transfer-out (credit) is a deduction from both cost and retail amounts of purchases. Normal losses, shortage, shrinkage are deducted from the goods available for sale at retail, after computing the cost ratio. Abnormal losses are deducted from both cost and retail amounts of purchases, before computing the cost ratio. Discounts to employees and favored customers are deducted from the goods available for sale at retail, after computing the cost ratio (in effect, this is an addition to sales) The original selling prices of goods may be modified as a result of some market and economic forces, thus the following terms: Original retail - the first selling price at which goods are offered for sale. Markup or additional markup ~ an increase in the selling price over the original retail price Markdown ~ decrease in the selling price below the original retail price Markup cancellation ~ a decrease in the selling price which does not bring the new selling price below the original retail Markdown cancellation — an increase in the selling price which does not bring the new selling price above the original retail price. Net markup - markup less markup cancellation. ‘Net markdown - markdown less markdown cancellation Mlustration of mark up and mark up cancellation * An item costing P100 is initially marked to sell at P150, The original retail is, therefore, P150 If the selling price of this merchandise is subsequently i s incr to P170, additional markup is P20. 0 If the selling price is then decrease d from P170 to P’ markup cancellation is P15. oe The difference between addit itional 0 ‘a Cancellation of P15, which is ree eed PS, is called net markup,hapter 1 - Inventories Mlustration of markdown and markdown cancellation + An item costing P100 is initially marked to sell at P150) 7 original retail is, therefore, P150- If the selling price of this merci decreased to P135, the markdown is If the selling price is subsequently increased from P135 to Pi4g, the markdown cancellation is P10. 5 and markdown € ren tween markdown of P15 an owe The. Slaton ot P10, which is P5, is called net markdown, and net markdowns, as well as the beginniiy The net marine 72 Conputaton of the cost percentagailamall deve ahe nding inventory at retail. This approximated average cost of the inventory is then compared with the net realizable value. The lower between the cost (approximating the result of the average cost method) and the net realizable value is the inventory amount that will be reported on the statement of financial position The following illustrates the nventory method: (Approximating Average Cost) Cost Beginning Inventory P70,000__P126,000_ EC hises. 340,000 438,000 Purchase Returns (20,000) (24,000) Purchase Allowances (2,000) Purchase Discounts (1,200) Freight-in 4,000 Additional Markups (net of cancellations) 24,000 Markdowns (net of cancellations) (10,000) Abnormal Losse: (18,000) (22,000) Departmental Transfers-out (8,800) __(12,000) P294,000 _ P394,000 _P364,000 _P520,000 Goods available for sale Cost-to-retail ratio: Goods available for Goods available for sale, at cost__P364,000 = 70% sale, at retail P520,000 Deduct: Sales Sales Returns P380,000 Employee Discounts Normal Losses Total Ending Inventory, at retail » P369,000 P151,000ac ‘Ending Inventory, at estimated cost: Ending Inventory at retail x cost percentage 151,000 x 70% When the retail method assumes a FIFO cost flow, the cost and the retail value of beginning inventory are excluded from the cost ratio {omputation. ‘The cost percentage that is developed is the ratio of the gurrent cost of purchases to the current retail prices of these purchasee [adjusted for net markups and net markdowns). The approximated coat of the ending inventory is, therefore, based on the ratio of cost to retail on current period purchases only. FIFO Retail Cost Retail Beginning Inventory ___P70,000 _P126,000_ Purchases 340,000 438,000 Purchase Returns (20,000) (24,000) Purchase Allowances (2,000) Purchase Discounts (1,200) Freight-in 4,000 Additional Markups (net of cancellations) 24,000 Markdowns (net o! ellations) (10,000) ‘Abnormal Losses (18,000) (22,000) Departmental Transfers-out __{8,800)_ 294,000 Goods available for sale _P364,000_ Cost-to-retail ratio = 294,000/394,000 = 74.62% Deduct: : Sales P380,000 Sales Returns (15,000) Employee Discounts 1,500 Normal Losses 2,500 Total 369,000 Ending Inventory, at retail P151,000 Ending Inventory, at estimated co: Ending Inventory at retail x cost percentage 151,000 x 74.62%% P.112,676 The amount of the endin; il E 0 ig inventory at retail would be the same in a apuiatione: however, the estimated cost of the ending inventory _ ‘vary, depending on the cost ratio applied. The method prescribed by is the method that considers both the net markups and teChapter 1 - Inventories EFFECTS OF INVENTORY ERRORS ‘The primary purpose of accounting for inventories is to measure ty amount of inventory that is shown as asset on the statement of finaneig position and the amount of inventory that will be reported as expense (enggl Of goods sold) in the statement of comprehensive income. Errors it the mensurement of inventory and the recording of purchases can resultigg inaccurate figures on the statement of financial position and statementgp comprehensive income. form part of expenses and are, if beginning inventory or the tated; consequently, if tated, profit will be Beginning inventory and purcha therefore, inversely related to profit. Thy cost of purchases is overstated, profit will be unde beginning inventory or cost of purchases is unde overstated. ‘The ending inventory is an asset and is, therefore, directly related i profit. Thus, if ending inventory is understated, the profit for the period is Piso understated; if ending inventory is overstated, the profit for the period is also overstated To illustrate effects of er ng to purchases and inventories, consider the following illustratic A. A purchase on credit towards the end of 2019 is omitted from both purchases account and ending inventory. The purchase is recorded in 2020 only when the goods are re Statement of Comprehensive Income 2019: Profit is correct. Purchases are understated, understating cost of goods sold; however, ending inventory is understated, overstating cost of goods sold. The effect of errors in purchases and in ending inventory offset each other. 2020: Profit is correct. Purchases are overstated, overstating cost of goods sold; however, beginning inventory is understated, understating cost of goods sold. The effect of errors in purchases c ee ‘hases and in beginning inventory offset each ‘Statement of Financial Position December 31, 2019 - Ending i are both understated ins inventory and accounts payable December 31, 2020 - Niven : statement teh csrdal ponies or exists anymore in the En twitA purchase on credit is omitted from the recorded purchases in 2019, but goods are appropriately included in the ending inventory: Purchases are recorded when the invoice is received in 2020. Statement of Comprehensive Income 2019: Profit is overstated because purchases ai™ Enderstated and, therefore,» cost of goods sold ia understated. 2020: Profit is understated because purchases are overstated and, therefore, cost of gods sold is overstated. Statement of Financial Position December 31, 2019: Accounts payable are understated because a purchase has been omitted. The balance of retained earnings is overstated because profit is overstated December 3 0 0 erro ymore in the statement of fir The overstatement in profit of the previo counterbalanced by the understatement in p Ending inventory is overstated becaus zoods were counted twice, but purchases are corr 1 Statement of Comprehensive Income 2019: Profit is overstated because cost of goods sold is understated resulting from overstated ending inventory 2020; Profit is understated because beginning inventory is overstated, and therefore cost of goods sold is overstated. Statement of Financial Position December 31, 2019: Ending inventory and retained earnings are overstated. December 31, 2020: All balances are correct because the errors in inventory and retained earnings in the previous year were counterbalanced this year. Note that if income taxes had been considered, the effect of the error ,Would be reduced. For example, if the ending i i : inventory is P100,000 and the company had an income tax rate of 30%,income taxes payable would ing overstated py only P70,000 and 30,000. Recognition as an Expense When inventories are sold, the carrying amount of those inventor seecognized as an expense in the period in which the relates Bee ie seco ‘The amount of inventories recognized as expense revenue is recognized Pe yactory costs of goods that have been sold during the period, ie : ; on the FIF (b) unallocated production overheads, Pen © or mounts of production costs of inventories, and ie Fonte " ple value of unsold goods, ee tt ; ed ir : nat reflects the method a é reporting the effects of ae all (direct inventory |Raw m Finish |Allowe UIREMENTS Total rgclose (AS 2, paragraph 26) [ven jforsin ted in measuring inventories) amount of inventories and the carying ations appropriate to the entity; + the carrying amount of inventories carried at fair value 1éss to sell; * the amount of ir period; entories recognized as an expense during ie the amount of any write-down of inventories recognized as @il expense in the period; the amount of any reversal of any write-down that is recognized as expense in the period the circumstances or events that led to the reversal of a writ down of inventories; and the carrying amount of inventories pledged as security liabilities, ic 32tories, rrying IFrom summary of significant accounting policies: Raw materials and purchased finished goods are valued at purchase cost. Work in ogress and manufactured finished goods are valued at production cost. Production cost Includes direct production costs and an appropriate proportion of production overheads and factory depreciation. Raw materials inventories and purchased finished goods are accounted for using lhe FIFO (first in, first out) method. The weighted average cost method is used for other limentories: An allowance is established when the net realizable value of any inventory item is lower than the value calculated abov lFrom supporting schedules (in millions of PHPs) \Raw materials, work in pi Finished goods \Allowance for write off at net rea Total linventories amounting 10 PHI 2 pledged as security fr financial liabilities. | |tory loss. Loss in inventory units and/or amount Bee eeean circumstances (such as theft and accidents) and loss tolerable limits Pe iesoant. ‘An incentive for early payment of amounts om credit transactions, normally quoted as a percentage; also settlement discount. Consigned goods. Inventory that is physically located at aude (consignee) but whose ownership is retained by the shipper (¢0 until the dealer sells the inventory Cost, Insurance and Freight (CIF). Term of sale where the seller pays thi Cost and freight necessary to bring the goods to the named port destination. The seller contracts for insurance and pays the insurance premium. This term of sale requires the seller to clear the goods f export. a Fair value. It is the price that would be received to sell an asset or palditay transfer a liability in an orderly transaction participants at the measurement > (IFRS 13, Fiar Value Measurement, paragraph 9). Finished goods. Manufact >roducts for which the manufacturing’ process is complete. First-in, first-out method. allocating cost to inventory items) that assumes that the ite sed will be the items first sold, FOB (free on board) destination. ms of sale under which title of goods - passes to the purchaser at the point of destination; a condition of sale under which the seller pays all f FOB destination, freight collect. Term of sale under which title of goods passes to the buyer that pays the freight cost at the point of destination. This amount paid by the buyer for freight is deductible, from the amount payable to the seller. FOB (free on board) shipping point. Terms of sale under which title of goods passes to the purchaser at the point of shipment; a condition of sale under which freight costs incurred from the point of shipment ate) paid by the buyer. FOB shipping point, freight prepaid. Term of sale under which title of goods passes to the buyer at the shipping point but the seller pal freight cost that should be borne by the buyer. The amount paid by te) seller for freight is an addition to the amount receivable from the bu} Free alongside (FAS). Term of shipment where the risk of loss shifts the seller to the buyer to a named port alongside a vessel designated the buyer; Used for sea or inland waterway transportation. 4 Goods in process. Inventory of a manufacturer that are partly proc and require further work before they can be sold; also called wor! process. 4 Gross method. A method of inventory accounting that records cost before considering cash discounts; also called gross price ’fit method. An inventory estimation technique based on the relationship between gross profit and sales. ‘The gross profit percentage js used to estimate cost of goods sold, which in turn is used to estimate the value of the inventory not yet sold. . Javentories. Assets held for sale in the ordinary course of business, i” the process of production for such sale, or in ‘the form of materials or supplies to be consumed in the production process OF i the rendering of services. ‘away sales. A retails sales promotion scheme where a customer deposits a portion of the cost of the merchandise he oF she wants but cannot buy at the present time. Usually, the store holds the merchandise until a certain date or before which the customer completes the payment and takes the delivery Markup. An increase in the selling price over the original retail price. Markup cancellation. A decrease in the selling price W h does not bring tthe new selling price below the original retail Markdown. Decrease in the selling price selow the original retail price. Markdown cancellation. Incr he selling price which does not bring. the new selling price above nal retail price Moving average method « d av ting method applicable to perpetual in eighted average unit cost of goods is ted a > eipt Net method. A method din e price less any cash discounts offer ethod, Net realizable value. business less the es‘ necessary to make the Normal inventory loss. $ foreseen events and loss considerec w 1 tolerable Periodic inventory system. A method of account ‘which cost of goods sold is determined and inventory proper balance at the end of the acco period, recorded in the purchases account, and ending inventory is determined by a physical count. Perpetual inventory system. A method of accounting for inventory in Which detailed records of each inventory purchase and sale are Maintained. This system provides a current record of inventory on hand and cost of goods sold to date. Raw materials. Inventory acquired by a manufacturer for use in the Production process course of mated costs ,mount due to or inventory in s adjusted to the Purchases are inventory method. A method used by companies in retail industry where the estimated cost of inventory is based on assumed relationship tween cost and retail prices after considering the changes i original retail prices. oS a identification. tifying and aggregating all costs directly related to each individual ‘A method of allocating cost to inventory based onChapter 1 - Inventories Trade discount. A reduction in the list price of an item which jg. amount actually charged to the customer; generally, trade diseg are dependent on the volume of business or size of order from customer. y Weighted average. A method of allocating cost to inventory items bagg on the weighted average of the cost of similar items at the beginhing of; period and the cost of similar items purchased or produced during th period.the Inventories are assets of an enterprise that are held for ale ordinary course of business; in the process of producti®hl 1 Aa, sales; or in the form of materials and supplies to be the production process or in the rendering of services. chase, costs of ‘The costs of inventories include all costs of purchase Tek. conversion and other costs incurred in bringing the inw their present location and condition entory is economic ‘The basic criterion for including items in invent control rather than physical possessior f rentories (a) to There are two main objectives for accounting for ir oi ed measure the amount of inventory to be recogni et in the statement of financial position, and (b) to mea: he amount of inventory that will bi a sta comprehensive incc : "i v ¢ adopted Two alternative accou ; opted by business enterprises eas perpetual invento’ ventory system does not mainta antitles or cost of inventory ages are summarized in nominal « at year-end to establis tories. A company using the perp naintains continuous record of inventory count is conducted at least onc balance per books ysic inventory The cost of inventories is computed using a derived cost formula. The cost of inventories that are not ordinarily interchangeable is determined using the specific identification method. The cost of goods that are ordinarily interchangeable is determined using either the first in, first out (FIFO) method or the weighted average method. IAS 2 does not allow the use of the last in, first out (LIFO) method as an inventory costing procedure Inventories on the statement of financial position are measured at the lower of cost and net realizable value, their cost being computed using a derived formula (specific identification, FIFO method, or Weighted average method). Net realizable value is estimated sales Price reduced by cost to complete and sell the goods. Any write Gown of inventories from cost to lower of cost and net realizable taken up as an expense on the statement of comprehensiveChapter 1 - Inventories ‘An error in recording purchases and inventories aay ial Fe ene etatements of the period in which the etd: il aia ancl ihe financial statements of the SuDSe qUciaIiaggy “@ Petimating procedures may be used to) detersineiii gammy » ® Retimating proctiyed by catastrophe, (© Meceuie iam (by ceerSeatement purposes and to valida . inventories for interim inventorietory ost determined through Physical Cougiiagag erpot g not allowed for annual financial statement pUrpoSesallig retail inventory WING APPLICABLE DIUM-SIZED ENTITIES ADDED LEAI TO SMALL ENTITIES AND There are nc at differences b ting for inventories foe 4 entities using full PFRS/IFRS ani RS/IFRS for Small andl Medium-sized Entities = that report based on PFRS Entities measure inventones ir statement of financial posi the lower of cost or market valle 6 ee value is determined as th able settling price to willing buyers of reporting date iDISCUSSION QUESTIONS Distinguish between the types of inventory accounts used for merchandising and manufacturing companies. What is the general rule /used to determine if an item should be included in inventory? Consider the concept in accounting for goods in transit and goods on consignment Discuss the differences between the perpetual and periodic inventory systems. What inventory system would you expect to find in each of the following situations? ‘a, Diamond ring department of a jewelry store b, _ Automot p ~ new car department © Hi tion supplies store d. Drugstore ch e. applies and bookstore What is the & ted measurement basis for inventory in the staten f financial position? Describe briefly ¢ Ds entation of inventories in the statement o} Which of ld be included in the inventory account of a man| ern @ Goods in tran: ed FOB shipping point, invoice b. Goods held on consignment ©. Goods out on con: n d. Goods out on approval by a customer € Goods in transit sold, Terms FOB shipping point Enumerate and describe three cost formulas or inventory cost allocation methods. Which method is used for items that are not interchangeable? What methods are used for items that are interchangeable? In periods of rising costs, which inventory costing method would result in the highest amount of profit? What is net realizable value? Briefly describe the accounting procedures for writing down inventory to its net realizable value under both direct method and allowance method. 39Name three situations in which the gross profit mae estimating inventory would be useful. What is the proper treatment of the following items when e of inventory is made using the retail inventory method? a Freight-in b. Purchase discount ¢. Departmental transfers in d. Normal spoilage e. _ Employee discounts f Net markups g Markdown cancellations Describe briefly the accounting and reporting of loss commitments W S on purchase a, the purchase contra b. the purchase contract is no is subject to revision and cancellation cancelable and a loss is probable on the Statement sive Income of the 14. Indicate ts of each of the following errors of Financial Posi current y ment of Comprehei and s a. ‘Thee’ ntory is understate b. Merchandise received was not recorded in the purchases) account until the succeeding year, although the item Wes cluded in inventory of the current year c Merchandise purc pped FOB shipping point wer not recorded in either the purchases account or the endiig inventory. 4 The ending inventory was overstated as a result of the inclusion of goods held on consignment. 15. Hamster Corporation seeks your help in determining the amount @ inventory that will be reported on the company’s _ statement financial position. Identify by writing a checkmark on Hi appropriate column whether each of the following will be included in the inventory cost. a. Goods displayed in the store b. Goods stocked in the warehouse, not covered by any sales contract . Goods purchased, in transit, shipped FOB seller d. Goods purchased, in transit, shipped FOB destination 40nase tion, s is ment f the yases was were nding etn [Include €. Freight cost on goods received, goods are still unsold f._Goods held on consignment [fg Goods out on consignment || hh. Goods out to customers on | approval i. Goods in the hands of travelin arrangement for the full selling price and other costs incurred |__by the buyer kk, Unu _ indirect material Goods __processing m, Direct materials stocke warehouse forage co: Insurance premiums paid __ stocked g p» Goods completed to customer's s| awaiting instruc by the customer q. Freight p r. Unused supplies for administrative purposes S_Unused store s € Goods sold with ar don goods sold UW. Goods sold under F |__port designated by the buyer V, Goods at the port, purchased CIF1-1 1-2. 1) Crossings Company rd Inventories PROBLEMS regularly buys merchandise from Company and is allowed trade discounts of 20% and 10% from the | list price. Crossings made a purchase on March 20, 2019, ang received an invoice with a list price of P150,000, a freight charge ofl P2,500, and payment terms of net 30 days. REQUIRED: What is the total cost of merchandise purchases? nad 10,200 units on April 30, 2019, based on physical ‘ollowing items have not yet been: Jane, Inc. count of goods on that date. Th recorded as purchases and sales as of April 30 Number a f ‘erm: of units ve FOB z point 250 2 3 ion 300 2 : OB destinatio 3 te sint 650 4 e 500 penis BE the seller April 30, 2019 and received by the buyer 9. UIRED: How many units should be considered as inventory at the end of Apt 20197 ‘The Orient Trading’s inventory at the end of 2019 is P9,500,000: before considering the following information. Included in the amount are the following items: + Merchandise in transit, purchased FOB shipping poinby 680,000. . Merchandise in transit, purchased FOB destination, with invoice cost of P420,000. . Goods held on consignment, P500,000. + Goods out on consignment, at cost plus 50% markup 0” 695! plus P10,000 delivery charge, P610,000. 42 a 14. RE Tt mi weChapter 1 - Inventories The P9,500,000 balance does not include the following items: ¢ Merchandise in transit to customers, FOB shipping point, at selling price of P540,000, which includes a 40% markup on. selling price. Merchandise in transit to customers, FOB destination at selling price of P400,000, which includes a 40% markup on. selling price. Merchandise purchased in transit, “Free Alongside,” costing P150,000. Merchandise sold, in transit, “Cost, Insurance, Freight,” charged to the buyer, with selling price of P180,000 and cost of P120,000. REQUIRED: What is the correct amou The physical inventory on Dec: 2 showed merchandise at P172,000. Y at t ng items were excluded from thi: ¢ Merchandise cost 50 pped by a vendor FOB shipping point on 019 and received by Tintin on January 5 Merchandise costing P40,000 shipped by a vendor FOB destination on December 30, 2019 and received by Tintin on January 4, 2020. Merchandise costing P12,500 which was shipped FOB destination to a customer on December 29, 2019. The customer expected to receive the merchandise on January 6, 2020. Merchandise costing P28,500 which was shipped FOB shipping point to a customer on December 29, 2019. The goods are scheduled to arrive at the destination point on January 2, 2020. REQUIRED: _ What is the correct amount of inventory that should appear on Tintin’s December 31, 2019 statement of financial position?‘Chapter_1 - Inve 1-5. Inventories is preparing its 2019 year-end finaneis adjustments, inventory is valued formation has been found relating t Centerpoint, Inc: statements. p562,500. The following 1m certain inventory transactions: 110,000 are on consignment with @ Goods valued at - oO ‘re not included in the P562,500. customer. ‘These goods inventory figure. b. fears) contin 27,000 were Feces from a vendor on prminny) 16,.2020..-The related ARH was received and Peenrded c e goods were shipped on: Decemb' 019, terms FOB shipping point 4 Goods costing P85,000 pped on December 31, 2019, and were delivered to th omer on January 2, 2020, The terms si FOB shipping point. The goods were included i 7 : 19, even though the omer on December 31) 4) 2019, ter not included in the Years end 5,900 and were delivered “| o the cust The sale was properly e nm invoice for goods costing P35,000 was recelesjaa™ stuschase on December 31, 2019. The Fella recorded a nation, were received on January 2, goods, shipped FOB 5020, and thus were not included in the physical, inventaa f Goods valued at P65,000 are on consignment from a vende ia goods are not included in the year-end inveAlell figure gS. A P60,000 shipment of goods to a customer on December 20; 2019, terms FOB destination, was recorded as @ sale in 2019. The goods, costing P37,000 and received By the customer on January 6, 2020, were not included in 2019 ending inventory REQUIRED: Determine the correct inventory amount to be reported on Cente inc.’s statement of financial position at December 31, 2019-St enh P562,509 vendor on seived and shipped on 31, 2019, y 2, 2020. ‘The goods though the cember 31, n the year~ > delivered, as properly ceived and The related January 2, inventory. 7 Mega Company had the following inventory transactions during 2019: Unit Units Unit Cost _ Selling Price Inventory, January 1 250. 10.50 Purchase, March 7 300, 11.00 Purchase, July 15 78 0 1a Sale, May 20 (120) Eee Sale, June 30 ie Sale, September 17 Inventory, December 31 300 REQUIRED. ending inventory, cost of goods sold and gross wing inventory cost flow methods. (Where necessary, round off unit Determine the cost profit under each of the Complete the cost to nearest c given bel Cost of Endin; Cost of Inventor Goods Sold Gross Profit FIFO a d Averags Weight Moving Average The following data were taken from the inventory records of Landmark Enterprises for January 20 Units Unit cost ~ Total cost Balance at January 1 2,400 25,800 Purchases: January 5 1,900 11.35 21,565, 24 11.80 44,840 Sales: January 8 30 Balance at January 31 REQUIRED: Determine the inventory value at January 31 assuming that — (Round off the unit cost to the nearest centavo and total cost to the nearest peso.) (@) Landmark Enterprises maintains perpetual inventory records and uses the average costing method. (®) Landmark Enterprises does not maintain perpetual inventory records and uses the average costing met : ei isThe inventory records of Rockwell Club, Inc. could not be Ios because the accountant quit without formal turnover of order to reconstruct the inventory at the beginning, the manager gathered the following data from their sales records for month of January _Units Unit Price January sales 160,500 P12.00 January purchases: January 4 30,000 7.80 0 37,500 7.50 16 45,000 7.20 42,000 7.40 on hi profit ary was P738,60( 4. Rockwell's gross ‘The company uses a ost of the January 1 tablished in 2017) acturers. The following ecords: 201 2018 2019 Number of units ed 13,0 18,000 25,000 Number of unit 16,000 24,000 Produ ‘ost per ur P70 P820 B50 ales for each year: 2017 P12,000,000 2018 P18,800,000 2019 29,400,000 REQUIRED: Determine the amount of gross profit for each of the years 201% 2018, and 2019 using (a2) FIFO method (b) Weighted average method applying the periodic int system4410. The Sta. Lucia Company, organized in 2017, used the averate costing method for its inventory. It is considering to change 1 inventory costing policy and to adopt the FIFO basis. Profit und&t the average costing method and inventory costs, based on Bo! average and FIFO methods, are shown below: 2017 2018 2019 Profit P3,600,000 P5,000,000 P7,000,000 Inventory, end: ‘Average basis 1,200,000 1,300,000 2,000,000 FIFO basis 1,240,000 1,420,000 2, 650,000 REQUIRED: Determine the profit of Sta. Lucia Company for each of the three years hhad the company used the FIFO costing method. Based on a physical inventory taken on December 31, 2019, City Company determined its chocolate inventory on a FIFO basis at 26,000. City estimated that, after further processing costs of 12,000, the chocolate could be sold as finished candy bars for 40,000. City's normal profit margin is 10% of sales. REQUIRED: Under the lower of cost and net reai 2 rule, what amount Should City Company report as chocolate inventory on its December 31, 2019 statement of financial position? The following information is available for the Century Trading: Product A B c D Cost P102 Pa5 P24 PO Estimated sales price 120 60 30 15 Estimated disposal costs 15 18 8 5 Number of units 4,000 6,000 5,500 7,200 REQUIRED: Using the lower of cost and net realizable vatue, determine the total inventory value to be resented ” Faaneey tatue to be presented in Century Trading’s statement ofChapter 1 - Inventories 1:13, The Dechavez Company reported the following inventory fj the end of each year: 12/31/19 12/31/18 12/31/17 Lower of cost and NRV 600,000 480,000 0 Cost (FIFO) 660,000 500,000 380,009 what Year Ended Tle 3119 12/31/18 Sales P3,200,000 2,900,000 Purchases 400,000 1,200,000 16. The Selling Expe! 450,000 330,000 110 ‘Administrative Expenses 300,000 310,000 con acco’ REQUIRED: reat Present the profit or loss section of the statement of comprehensive Inve’ income for the years ende e 2019 and 2018 using prod (a) method (Dat 0) a c cra 1-14. Purple Compar d its December 31, 2019 inventor on a Fl 90. Information pertaining to thal inventory follows Estimated sellin; ice P204,000 Normal profit 30,000 a red Purple records losses that result from applying the lower of cost ail net realizable value rule. se REQUIRED: a What is the amount of loss that Purple Company should recognize at (a) December 31, 2019? () 1-15. The following information pertains to Powder Blue Companyiall (© December 31, 2019: P Inventory, January 1 1,400,000 Purchases during the year 6,600,000 Inventory, December 31: Cost 1,200,000 Net realizable value 1,000,000 48.inventories fe s ind net realizable Prior to 2019, the application of the lower of cost and ns value never produced a write down in the company’s inventory to an amount below cost. REQUIRED: What is the cost of goods sold assuming the company applies the lower of cost and net realizable value using the allowance metho s Company uses the first-in, first-out method in calculating the cost of goods sold for the two products that the company sells. At January 1, 2019, the balance of inventory account was P435,000 and the allowance to reduce inventory to net realizable value had a balance of P15,000. 1:16. The Philam Groc a Inventories and purchases information concerning these two products are given for th 2019 Date ansaction Product X Product ¥ Jan. 1 vente 2 0 10 @P9O. Jan.1 — | Purch: 2 P122 | 1,000 @P94 | Dec. 31 | (in chronolo; tory that Dent: oe [Dee 31 | sates 7 ood @eien| S obNee en nt order, Philai and Product Y by At December 31 suppliers reduced the prices of both F 10%, effective January 1, 2020 2 consequence, Philam also reduced its selling prices for Product X and Y by 10%, effective and January 1, 2020. Selling cost is consistently 10% of sales price REQUIRED: (a) Determine the cost of the inventory of Product X and Product Y ze at at December 31, 2019. (b) At what amount should the inventory be shown on December 31, 2019 statement of financial position? ‘ \ (e) How much cost of goods sold will be shown in the statement es of comprehensive income for the year ended December 31, 20197 (a) How much gain or loss shall be recognized as a result of measuring the inventories at the lower of cost and net realizable value? Give the entries to set up the ending inventory and the adjustment of the related valuation account at the end of the ‘year.Chapter 1 - Inventories 1-17. Your audit of DEC Company's inventory and related reso revealed the following information: Merchandise inventory, January 1, 2019 P_ 450,000 Purchases for the year 2019 3,150,000 Sales for the year 2019 4,200,000) You conducted a physical inventory on December 31, 2019/¢nd determined P500,000 was in the company’s warehouse il Assum some new employ jer, | company’s president suspects som ployees may have years pilfered a portion of the merchandise inventory. flood? REQUIRED: Determine the estimated cost of the m ventory, assuming DEC 1-20. The F Company’s gross profit remained con. produ a availe (a) 40% of fe Inven b) 40% of cost of ie : Gros: 1-18. You took a physical inventory for your sole proprietorship alli close of business on 31, 201 ‘The inventory totaled P205,000. You were verifying the accuraeyd the inventory records at June 30, 2019, therefore you must esbimils fan inventory amount on that date. You find that during the PEN duly 1 through July 31, 2019, sales were P705,000; sales retin AtD P18,000; gross purchases, P650,000; purchase returns, P12/00% FOB freight-in, P6,000. REC ‘REQUIRED: Det What is the estimated cost of inventory on June 30, 2019 assuiitd ass that goods are sold at 20% above cost? Proj On May 6, 2019, a flash flood caused damage to the merchants 121. o1g stored in the warehouse of Manel Company. You were asked ag submit an estimate of the merchandise destroyed in the wareh® ene ‘The following data were established: ‘ al 2018 net sales, P8,000,000 matched against cost of P5,600,000: Merchandise inventory, January 1, 2019 was P2,000,000, which was in the warehouse and 10% in downtown showroom:ming DEC hip at the couracy of st estimate ‘the period J returns: , P12,000, 7 assuming erchandist fe asked wareho™ 10 se: Chapter 1 - Inventories From January 1, 2019 to date of flood, you ascertained, the following: invoice value of purchases (all stored in the warebense), 1,000,000; freight inward, P40,000; purchase returns, P60,000. Cost of merchandise transferred from the warehouse to showkOU, was P80,000 and net sales from January 1 to May 6, 2 warehouse stock) was P3,200,000. REQUIRED: eas in the previous ssuming gross profit rate in 2019 to be the same as in # ie = ae was ‘the estimated cost of merchandise destroyed by th a (Phil. CPA Adapted) ‘The Herminia Company zed in buying and selling cleansing products. The following ons and other information are available for the year ended Dec 019: 3019 P 200,000 Inventory, Janu i Ehases, all under coca Purchase returns made by the made befo: Gross sale: Sales allowanc Sales returns At December 31, 2019 FOB shipping point REQUIRED: Determine the estimated cost of inve assuming that the company sells its products allowing a 40% gross profit on sales, Old Rose Company's pricing structure has been established to yield a gross margin of 30%. The following data pertains to the year ended December 31, 2019: Sales - P2,200,000; Inventory; January 1, 2019 - P1,000,000; Purchases - P800,000; Freight cost on purchases ~ P20,000; Freight cost on merchandise sold — P30,000; Inventory inside the company’s warehouse, per actual account on 12/31/19 - P160,000; Credit memo issued to customers for goods returned and received — P50,000; Credit memo issued to customers for merchandise to be returned, 01/02/20 - P40,000; Sales Discounts — P100,000,Chapter 1 - Inventories Old Rose Company een fully and properly recorded. REQUIRED: How much would Old Rose Company reasonably estimate a3 q shortage in inventory at December 31, 2019? esi Pure! Addit 1-22, Blazing Red Company began operations in 2016. On AUgHsE ag Mark 2019, a fire broke out in the company’s warehouse destroying all Mark javentory and most of the accounting records. . The following Mark information was assembled from the microfilmed records. All sales) Sales and purchases are on account Sales Sales 2019 Aug. 28, 2019) Inventory 575,400 — REQL Accounts Receivable 522,360 P515,560 ‘Accounts Payable 352,560 491,400 what Collections from cx 5, aun January 1 to Augu 2019 3,015,200 Payments to suppliers January 1 to August 28, 2019 1,950,000 Goods out on consignment The August 28, 2019, at cos! 195,000 follov Goods in transit at August 28, 2019 purchased FOB shipping point 69,500 Be ‘The company’s average gross profit percentage for the past thie Ee years is 30%. Bee REQUIRED: ae What is the inventory fire loss? a li incr 1-23. Chic Department Store uses the retail method of inventory. Abie a end of June, the records of the company provided the followifé as information: : : 4 is Si Q Purchases during June: at cost, P2,400,000; at retail, P4,000,000: Sales during June: P3,500,000. a y we Inventory, June 1; at cost, P355,000; at retail, P750,000. REQUIRED: Estimate the ending inventory and cost of goods sold for June ut (a) FIFO cost basis; and(b) Average cost basis (round off cost ratios to two decimals). London Company uses the FIFO retail method of inventory valuation. The following information is available: Cost Retail Beginning inventory P145,000 P160,000 Purchases (net) 283,920 420,800 Additional markups 5,200 Mark up cancellations 9,200 Markdowns 38,100 Marisdown cancellations 6,900 Sales revenue 450,000 Sales returns 15,200 Sales discounts 3,800 REQUIRED. What would be the d cost of ¢ inventory, using average cost retail? (AICPA Adapted) ‘The inventory records c. disclosed the following data for Beginning Inventory P 630,000 Beginning Inventory et e 1,050,000 Purchases - at cos 420,000 Purchases - at retail value 000. Net sales amounted to P1,050,000; markdowns amounted to P105,000, During the month, the sales manager increased the selling price of 1,600 pieces of T-shirts by P5S0.00 because of the increase in demand. This increase was subsequently canceled on the remaining 300 pieces. The physical inventory on January 31, 2019 was P665,000 at retail value. REQUIRED: What was the invento 31, 20192 ry overage (shortage) at retail value on January,Chapter 1 - Inventories 1-26. The retail inventory method is used by Uniwide Sales. The reg __ items was 658,000. of inventory, purchases, and sales for the year 2019 are given be} Cost Retail Beginning Inventory 185,700 P202,000 Purchases 339,380 458,000 Purchase Allowance 11,000 Freight-in 7,300 Departmental Transfers-in 2,000 3,000 Additional Markup: 12,000 Markup Cancellations 2,500 Inventory Shortage 7,000 Sales (including sales of P4,500 which were marked down from P6,000) 374,000 REQUIRED: (a) Compute the cost of the ending inventory using (1) average retail method ai (2) FIFO retail method () Compute the cost of goods sold under the two methods in a); Examination of the recor mpany for the year ended + Inventory at January overstated by P71,000 because some inventories were counted twice on December 315 2018. Goods in transit from a supplier on December 31, 2019 under FOB shipping point were appropriately recorded as purchases but were not included in the physical count, P96,000. Grand recorded as sales a P60,000 invoice price of goods shipped to customers on December 30. The goods costing = P52,000, were in transit at December 31 and were excluded from the ending inventory. 60% of these goods were shipped FOB shipping point, while the remaining goods were shipped FOB destination. Purchases of P100,000 were recorded when payment was in 2019, although the goods were received in 2018 and ™ included in the 2018 ending inventory. Profit before income tax and before adjustments for ec edsREQUIRED: (a) Calculate the correct profit before income tax for 2019. (b) Determine the net effect of the foregoing errors on profit before income tax for the year 2018. During 2019, USTFU Company signed a non-cancelable contract with Nueva Ecija Milling Company to purchase 1,000 sacks of rice at P1,200 per sack with delivery to be made in 2020. On December 81, 2019, the price of rice had fallen to P1,150 per sack REQUIRED: Give the entries on December 31, 2019 and on February 28, 2020 (the date of actual purchase) when the market price on February 28, 2020 of each sack of rice (a) 1,150 (6) P1,100 () 1,220Chapter 1 - Inventories MULTIPLE CHOICE QUESTIONS Which of the following would be reported as inventory? 1. Land acquired for resale by a real estate firm I. Agricultural produce held by a farm MI. Partially completed goods held by a manufacturing company IV. Machinery acquired by a manufacturing company for use in the production process 1, i, I and IV I, Il, and I Ii, I, and IV I and III only Goods on consignment should be included in the inventory of a. _ the cons b. the consignee. ¢. _ both the consignor and the o d. . neither the consignor nor the con: Which of the following shall be included in the cost of inventories? a Selling costs. b. Freight charges on goods acquired FOB destination. 6 Abnormal amounts of wasted rials, labor, or other production costs. d. Storage costs that are necessary to a further the production process, Inventories encompass L I. Ill. finished goods produced. IV. abnormal amounts of wasted materials, labor and other production costs. 1, Il, IM, and Iv. 1, Il, and il. Tand Il. Tonly.Under these shipping terms, the buyer pays for the freight, which legally must be borne by the seller. FOB shipping point, freight prepaid. FOB shipping point, freight collect. FOB destination, freight prepaid. FOB destination, freight collect When using the periodic inventory method, which of the following generally would not be separately accounted for in the computation of cost of goods sold? Trade discounts applicable to purchases during the period Cash (purchase) discounts taken during the period Purchase returns and allowances of merchandise during the period Sost of transportation-in for merchandise purchases during the period (AICPA Adapted) How should the follo 08 Jer’s inventory? Freight-in a, Increase b. Increase c. No effect d. No effect No effect Which of the following stat re true regarding perpetual inventory method? L Purchases are recorded as debits to inventory account. UL The entry to record a sale includes a debit to cost of goods sold and a credit to inventory After a physical inventory count, inventory is credited for any missing inventory. Purchase returns are recorded by debiting accounts payable and crediting purchase returns and allowances. Tonly. Land If only. Mand Il only 1, IL, and Il,Chapter 1 - Inventories MC9 Which costing method is appropriate for inventories that cia In Pe gregated for a specific project and inventories that are Mi flow 1 ordinarily interchangeable? a Specific identification b. b. Standard cost © ©. — Weighted average a. Moving average - mcis Und diset MC10 Which of the following inventory costing methods repofts most Closely the current cost of inventory on the statement of financial E position? os a. Specific identificatior c tin, first Keene Weighted aver ee MC11 During periods of rising prices, when the FIFO inventory costifiag aoe method is used, a perpet y a would p i q b. j a, not be permitted. 2 Bet ending inventory than a periodi¢ : result in th ndir ntory as a periodic inventol ) ae oe wer7 W 4. result in a lower ending inventory than a periodie inventory eh system. (AICPA Adapted) ie I MC12 Ina period of rising prices, the inventory cost formula that tends H result in the highest reported profit is a Vv. a, _ first-in, first-out b. specific identification. i @. moving average ‘C d. _ last-in, first-out z (aicpa Adapted) a MC13 When using the moving average method of inventory valuation # Mcig 7 new average unit cost must be computed after each purchase. : issuance from inventory. ' purchase and issuance from inventory. month-end. pege414 In periodic inventory system that uses the weighted flow method, the beginning inventory is net purchases minus the ending inventory. net purchases minus the cost of goods sold. total goods available for sale minus the net purchases total goods available for sale minus the cost of goods sold. Under the net method of recording purchases, the purchase discounts not taken are ignored. treated as additional cost of inventory absorbed by cost of goods sold. reported as finance costs. ‘The retail inventory method would include which of the following in the calculation of the goods available for sale at both cost and retail? Purchase return Sales retu Markdowns Markups Which of the followin; o ne disclosed in the entity’s financial state” I Cost formula used IL _ Volume of inventories purcha: ing the period Mf. Amount of inventories i as expense during the period Amount of rev w entories Amount of inventories pled; loan security 1, I, IIl, IV and IV I, UI, IV and V 1, I, Ill and IV 1, ll, IV and V ‘The average retail method is based on the assumption that the ratio of gross margin to sales is approximately the same each period. d Tatio of cost to retail changes at a constant rate. beginning inventory and the cost of goods sold contain the same proportion of high-cost and low- cost ratio goods. gross margin percentage applicable to ending invento Se eee acleicuiieg jherperiod ia Heed, ie (AICPA Adapted)Chapter 1 - Inventories MC19 Which statement is accurate about calculating the cost ratio. used under the average retail inventory method? a a. The beginning inventory is excluded and markd A irkdow deducted. ae ‘The beginning inventory is included and markdowns q deducted a ¢. The beginning inventory is included and markdo deducted. ie The beginning inventory is excluded and markdowns’ are deducted b. MC20 A company using a periodic inve stem neglected to record @ purchase of merchandise on account at year-end. The amount 6f this merchandise was omitted from the year-end physical count How will these errors affect inventory at year-end and cost of goods sold for the year? Inventory Profit fe Understate dersta Understat ti No effect MC21 During 2019, the Mitt Co. signed a non-cancelable contrach i purchase 2,000 units of a raw material at P32. per pounds 08 December 31, 2019, the market price of the raw material is P26 per unit, and the of the finished product is expected to decline accordin; The financial sta prepared for 2019 should report ement: a. an appropriation of retained earnings for P12,000. b. nothing regarding this matter © a note describing the expected loss on the purchase commitment. da loss of P12,000 in the statement of comprehensWs income. Mc22 Galleria Sportswear, Inc. regularly buys sweaters from Bon Company and is allowed a trade discount of 20% and 10% from list price. Galleria made a purchase on March 20, 2019) received an invoice with a list price of P90,000, a freight ch P5,000, and payment terms of net 30 days. Mc23 mc24What is the total cost of the inventory purchase? P63,000 P64,000 P69,000 P69,800 andise quoted and Celine Company purchased an item of merch: Trade discounts of listed at P150,000 under the following terms: 15%, 10%, 5%, 2/11, n/30. What was the invoice price of the merchandise? 100,900.00 105,000.00 109,012.50 106,832.25 How much was the cash he discount period? Use the same information given in MC2; payment if settlement was made within t a. 106,832.25 b, P104 ©. P102 d. P100,842. Rock Distributors, a comp’ irra Mall, specializes in the sale of IBM compa’ nd ackazes and had the following transactions with one Purchases of IBM compatibl P3,280,000 Purchases of commercial software package 900,000 Returns and allowances 80,000 Purchase discounts taken 27,000 Purchases were made throughout the year on terms 3/11, n/30. All returns and allowances took place within 5 days of purchase and prior to any payment of account. How much were the discounts lost? P98,400 P96,000 P71,400MC27 MC26 Robinson Company’s F inventory at December 31, P1500,000 based on a physical count of goods priced efore any necessary year-end adjustment relating to What amount should Robinson Company report as inventory omit December 31, 2019 statement of financial position? a. b, a d The inventory c is valued at a cost of P3,000. included in the invente a The company sells goods at 150% of cost. Included in the physical count were goods billed to a ¢ F.0.B. shipping point on December 31, 2019. Thes had a cost of P30,000 and were picked up by the January 10, 2020. Goods shipped F.0.B. shipping point on December 28, from a vendor to Robinson were received on January 4, 20 The invoice cost was P50,000. P1,470,000 P1,480,000 P1,520,000 P1,550,000 Goods purchased in transit shipped FOB destination, witty price of P300,000, which includes freight charge P30,000. Goods sold in transit FOB destination with invoice price/aly 490,000 which includes freight charge of P40,000)%9) deliver the goods Goods held on consignment by SM at a sales pricest P100,000, excluding a 20% commission on the sales P Freight paid by SM, P10,000. Goods purchased in transit FOB shipping point with im of P600,000. Freight cost amounts to P60,000. Shipping cost amounts to P30,000.‘The accounting staff of Yellow Ribbon Company submitted an inventory list at December 31, 2019 which showed a total of P5,000,000. The following information that may or may not be relevant to the inventory value submitted, are given below and on the next page. Excluded from the inventory were merchandise costing P80,000 because they were transferred to the delivery department for packaging on December 28 to be shipped on January 2, 2020. ‘The bill of lading and its import documents on merchandise were delivered by the bank and the trust receipt accepted by the company on December 26, 2019. Taxes and duties have been paid on this shipment but the customs broker has not delivered the merchandise until January 7, 2020. Delivered cost of shipment totaled P800,000. This shipment was not included in the inventory in December 2019. 2 commitment A review of the company to buy P100,000 worth of mercha: ot included in the inventory because the goods were rece January 3 2020. Suppliers’ invoice for dated December 28, 201° December 30, 2019 althoug Shipment term is FOB December 31, 2019 invente Goods valued at P20,000 were r y per 28, 2019 for approval by Yellow Ribbon Co ne _inver included this merchandise in the list but did not place any value onit, On January 4, 2020, the company info \e supplier by long distance telep of the acceptance of the goods-and the supplier’s invoice was received on January 7, 2020. y team On December 27, 2019 an order for P25,000 worth of merchandise was placed. This was included in the year-end inventory although it was received only on January 5, 2020. Seller shipped goods FOB destination. The correct merchandise inventory at December 31, 2019 of Yellow Ribbon Company was a. 5,055,000 _ P5,825,000 ~ “P5,855,000 P5,880,000 (Phil. CPA Adapted)Chapter 1 - Inventories Mc29 ‘The following purchase transactions occurred during days of Whilczel Company’s business year, which ends on 31, or in the first few days after that date. A periodic inve ‘system is used. 1. An invoice for P6,000, terms FOB shipping point, was rece} and entered November 1. The invoice shows that the mat was shipped October 29, but the receiving report indicates receipt of goods on November 3. ‘An invoice for P2,700, terms FOB destination, was received): and entered November 2. The receiving report indicates that the goods were received October 29 ‘An invoice for P3,150, terms, FOB shipping point, was receivedll October 15, but never entered. Attached to it is a Tecelving report indicating that the goods were received October Igy Across the face of the receiving report is the following notations “Merchandise not of same quality as ordered - retumed fom credit October 19. An invoice for P’ s FOB shipping point, was received} and entered Oc ‘port attached to the invoice indicat received, October 21 if An invoice for P4,800, terms FOB destination, was FecelNea and entered October 28. The receiving report indicates tal the merchandise was received November 2. Inventory was determined by physical count on October 31/8 P77,500. October 31 statement of financial position? a. P86,200 b. — P83,500 c. 80,350 d. P74,850rt indicates Was received idicates that was received S a receiving October 18, ing notation; retumed for was received tached to the M31 October 27 in was received ndicates that ctober 31 48 _ shown in the Mc32 Chapter 1 - In in its statement of financial ‘The Elegance Manufacturing Company, nee position as of December 31, 2019, has an inven! which consists of: paid insurance on inventory 20,000 Work in process : 380,000 Finished goods 450,000 hipped on consignment, at selling price with 20% profit on sales to be shown in the statement of 's of December 31, 2019? What is the cost of invento financial position of a. _P1,625,000 b. 1,595,000 The inventor oun included the f Goods purcha: Merchan (includ ark Goods held or Goods out on app’ at Based or December P81 P84 87,500 91,600 poop You were furnished the following data of Filinvest Sales Company relative to Commodity Excel: January 1 4,000 units at P25 January 4 3,000 units at P26 January 15 3,500 units at P28 January 25 500 units at P27 January 3 3,000 units at P35 January 16 2,000 units at P36 January 28 1,000 units at P37Chapter 1 - Inventories a How much is the gross profit on sales if the company uses inventory costing system? a 62,000 b. 58,000 c P50,000 4 46,000 Ever Company recorded the following data pertaining to Inventory x. during January 2019: Received Unit Cost Sold On hand J Inventory P8.00 3,200 1,600 1,600 4,800 P9.60 6,400 t is the moving aver cost of Inventory X at January 31, 2019? b. P8.9 P9.20 as been using the lower The manageme F s inventory. It maintains of cost and ne on each; estimated sales pricey ‘each; and normal profit Confidence: 300 on hand; co’ P30; estimated dis 10% of the sz Positive Attitude: 200 on hand; cost, P55 each; estimated sales price, P80; estimated distribution cost, P28; and normal profit, 20% of the sales price. Using the lower of cost and net realizable value, what are the unit inventory values for Confidence and Positive Attitude? Confidence, P27; Positive attitude, P52 Confidence, P22; Positive attitude, P52 Confidence, P22; Positive attitude, P55 Confidence, P27; Positive attitude, P55 aoge (Phil. CPA MC36 pa ey Eecas The December 31, 2019 inventory of Hope Company consisted of four products, for which certain information is provided below: Estimated Estimated’ Normal Unit. Number disposal cost selling price profit Product Cost ofunits — perumit —_per-unit H 25 ‘1,000 6.50 40 © 42 2,000 12.00 48 ventor P 120 000 25,00 190 eg E 18 4,000 3,00 26 n hand Hope Company measures its inventory at the lower of cost and net 3,200 Hillizable value on an item-by-item basis. 1,600 6,400 How much is the total inventory value at December 31, 2019? Janu: a. P692,500 ma b. P541,000 S 000 a P469,000 of Gotesco Corporation was on cost is 40%. The Mc36 On March 31, 20 destroyed b; following info mark up vailable ag the a Inventory, Decembe 018 P 600,000 It maint Purchases Feaacy >640,001 400,000 Bee cry 500,000 rice, ry i sales Pri March 850,000 600,000 ormal profit, mediately before the fire? What is the cost 0 mated sales a. 600,000 me} normal b. —_P532,000 ey ©. 500,000 d. 450,000 are the 2% Mes: 7 Ali Mall's accounting records indicated the following information: 12/3119 1/9 Inventory (based on physical count) P110,000 — P180,000 Accounts Receivable 900,000 700,000 Accounts Payable 250,000 300,000 ss pws Collections from customers 2,800,000 it, CP. Payments to suppliers 2,550,000 All sales and purchases are on credit, Ali Mall's gross profit rate ased on cost has remained constant at 25% in recent years.20,000 (20,000) P(170,000) 170,000 seop MC38 On December 31, 2019, Georgetown Corporation lost ally warehouse inventory by fire. Data for years 2017, 2018, and 20ig follow: 2019 2018 2017 Inventory, January 1 —_P 520,000 P 705,000 P 425,000) Net purchases 2,180,000 1,365,000 1,320,000 : Net sales 2'500,000 2,000,000 1,700,000 e Goods with selling price of P150,000 were sent on consignment tg ‘Atlas Trading. As of December 31, 2019, these goods are unsold : and still in the possession of Atlas Trading. " On December 28, 2019, goods costing P95,000 were purchasediia Georgetown, terms FOB ship The goods are still in| te transit but were properly recorded by Georgetown as purchalel ‘ during 2019 P i o What is the cost of the inventory lost by fi P705,000 W 705,000 3 b. _P750,000 c. P845,000 2 P950,000 4 c (On September 15, 2019, a fire destroyed significant portion of Hie) d merchandise inventory of National Wholesale Corporation. THe) following information was available from the records of Mi Mea g company: ‘ Jan. 1, 2019 2 to date of fire 5 Sales 450,200 ares Sales Returns and Allowances 5,100 Purchases 378,245 Purchase Returns and Allowances 10,295 Beginning Inventory 105,650 The company determined the cost of inventory not damaged | P69,738. Damaged inventory of National, which cost Plea an estimated realizable value of P5,000.insold sed by still in chases ‘What is the estimated fire loss on September 15, 2019? P74,738 P66,684 P61,584 51,684 “On September 30, 2019, a flash flood damaged the warehouse and factory of Waltermart, Inc. completely destroying its work in Process Hrcentory, ‘There was no Gamage to either raw materials or finished goods since these were stored in an elevated section of the warehouse. A physical inventory taken immediately after the flood subsided Shawed the following: Raw materials - P740,000; Finished goods ~ 1,310,000. Inventories at January 1, 2019 consisted of the following: Raw Materials — P400,000; Work in Process ~ P1,100,000; Finished Goods ~ P1,500,00 ‘The company’s eral years is 25%. Sales for the first nine months of 2019 w 000,000. Raw materials purchas ; 0 ec for the period amounted to P960 verhi applied at 50% of direct labor cost What is the value 1 ocess lost from flood at September 30. 580,000 640,000 670,000 720,000 Syvels Trading uses the retail inventory method to estimate inventory. ‘The following information was obtained from the accounting records for the year ended December 31, 2019: At cost: Inventory, January 1 - P617,000; Purchases ~ P1,281,000; Purchase returns — P21,000; Freight-in - P31,000. At retail: Inventory, January 1 - P1,057,000; Purchases — P2,158,000; Purchase returns - P35,000; Sales ~ P2,365,000: Sales returns - P62,000. iChapter 1 - Ir ntories, How much is the cost of inventory pilferage if the physical revealed an ending inventory at retail of P780,000? a. P107,000 b. —-P_97,000 c P 58,200 4. dP 38,800 c45 WI MC42_ The following data is available for Corona Trading: Meee Cost Retail : Inventory, January 1 P 47,075 P 70,095 . Purchases (net) 213,327 306,375, . Freight in 3,400 Ss 320,500 Additional markups 18,900 c tion of additional markups 7,800 Markdowns 10,640 2 Physical inventory, December 31 e at retail 39,390 a : w Corona Trading us 2 tail method IWhat is the cost of goods sold b sss on inventory shortagen : : c 248,355 Pai d 225,17 224,350 peop MC43._ Use the same information given in MC42. The estimated loss frail inventory shortage is P11,879.00 P12,727.50 P16,970.00 P39,452.00 ao oe MC44 Webster Company uses the average retail method of inventon valuation. Following are the information available: Cost Beginning inventory P 23,000 Purchases 120,000 Net markups Net markdowns Sales revenueWhat is the estimated cost of ending inventory? 80,000 48,000 44,000 38,133 While examining the December 31, 2019 financial statements of Google Company, the following errors were discovered. Ending inventory was overstated by P10,000. Beginning inventory was understated by P4,000. P100,000 worth of merchandise was purchased and received towards the end of 2019 and included in inventory. — The purchase was recorded in 2020 wher ‘ent for the goods was made. Profit reported e 2019 profit and loss adjustment for the given items is P600,00 What is the ad prc t 31, 2019? 494,000 486,000