PAS 2 Inventories
Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale or in the form of
materials or supplies to be consumed in the production process or in the rendering of services
Inventories also encompass finished goods produced, goods in process and materials and supplies awaiting use in the production
process.
Classes of inventories
1. Trading concern – is one that buys and sells goods in the same form purchased. “Merchandise inventory” is generally
applied to goods held by a trading concern.
2. Manufacturing concern – is one that buys goods which are altered or converted into another form before they are made
available for sale.
 Finished goods
 Goods in process
 Raw materials
 Factory or manufacturing supplies
Cost of inventories:
1. Cost of purchase
2. Cost of conversion
3. Other cost incurred in bringing the inventories to their present location and condition
Cost of purchase
 Comprises the purchase price, import duties and irrecoverable taxes, freight handling and other costs directly attributable to
the acquisition of finished goods, materials and services.
 Trade discounts, rebates and other similar items are deducted in determining the cost of purchase
Cost of conversion
 Includes cost directly related to the units of production such as direct labor.
 It also includes a systematic allocation of fixed and variable production overhead that is incurred in converting materials into
finished goods.
Fixed production overhead is the indirect cost of production that remains relatively constant regardless of the volume of
production.
 Depreciation and maintenance of factory building and equipment and the cost of factory management and administration.
Variable production overhead is the indirect cost of production that varies directly with the volume of production
 Indirect labor and indirect materials
Other cost is included in the cost of inventories only to the extent that it is incurred in bringing the inventories to their present
location and condition.
Excluded from the cost of inventories:
 Abnormal amounts of wasted materials, labor and other production costs.
 Storage costs, unless necessary in the production process prior to a further production stage. Storage cost on goods in process
are capitalized but storage costs on finished goods are expensed.
 Administrative overheads
 Distribution or selling costs
Cost of inventories of a service provider
 Consist primarily of the labor and other costs of personnel directly engaged in providing the service, including supervisory
personnel and attributable overhead.
 Labor and other costs relating to sales and general administrative personnel are not included but are recognized as expenses
in the period in which they incurred.
Cost formulas
 First in, First out
 Weighted average
The standard does not permit anymore the use of the last in, first out (LIFO) as an alternative formula in measuring cost of
inventories.
First in, first out (FIFO)
 The goods first purchased are first sold” and consequently the goods remaining in the inventory at the end of the period are
those most recently purchased or produced.
 Rule: First come, First sold
 The inventory is thus expressed in terms of recent or new prices while the cost of goods sold is representative of earlier or
old prices
 Favors the statement of financial position in that the inventory is stated at current replacement cost.
 The objection to the method is that there is improper matching of cost against revenue because the goods sold are stated at
earlier or older prices resulting in understatement of cost of goods sold.
 In a period of inflation or rising prices, the FIFO method would result to the highest net income
 In a period of deflation or declining prices, the FIFO method would result to the lowest net income.
Weighted average
 The cost of the beginning inventory plus the total cost of purchases during the period is divided by the total units purchased
plus those in the beginning inventory to get a weighted average unit cost.
 Such weighted average unit cost is then multiplied by the units on hand to derive the inventory value.
 The average unit cost is computed by dividing the total cost of goods available for sale by the total number of units available
for sale.
 The weighted average method produces inventory valuation that approximates current value if there is a rapid turnover of
inventory
 The argument against the weighted average method is that there may be a considerable lag between the current cost and
inventory valuation since the average unit cost involves early purchases.
Last in, first out (LIFO)
 The LIFO method assumes that the goods last purchased are first sold and consequently the goods remaining in the inventory
at the end of the period are those first purchased or produced.
 The inventory is thus expressed in terms of earlier or old prices and the cost of goods sold is representative of recent or new
prices.
 Favors the income statement
 The objection of the LIFO is that the inventory is stated at earlier or older prices and therefore there may be a significant lag
between inventory valuation and current replacement cost
 In a period of rising prices, the LIFO method would result to the lowest net income.
 In a period of declining prices, the LIFO method would result to the highest net income.
Specific identification
 Means that specific costs are attributed to identified items of inventory
 Cost of the inventory is determined by simply multiplying the units on hand by the actual unit cost
 Appropriate for inventories that are segregated for a specific project and inventories that are not ordinarily interchangeable.
Measurement of inventory:
 Inventories shall be measured at the lower of cost and net realizable value
 The cost of inventory is determined using either FIFO cost or average cost.
Net realizable value
 is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost
of disposal.
 Inventories are usually written down to net realizable value on an item-by-item or individual basis.
Accounting for inventory writedown
 If the cost is lower than the net realizable value, there is no accounting problem because the inventory is stated at cost and the
increase in value is not recognized.
 If the net realizable value is lower than the cost, the inventory is measured at net realizable value.
 The writedown of inventory to net realizable value is accounted for using the allowance method.
Allowance method
 The inventory is recorded at cost and any loss on inventory writedown is accounted for separately.
 Also known for loss method
 If the required allowance increases, an additional loss is recognized.
 If the required allowance decreases, a gain on reversal of inventory writedown is recorded.
 The gain is limited only to the extent of the allowance balance.
Problem 1
Childish Company provided the following information in relation to an inventory:
Materials
700,000
Storage cost of finished goods
180,000
Delivery to customers
40,000
Irrecoverable purchase taxes
60,000
At the figure should the inventory be measured?
Material
Irrevocable purchase taxes
Value of inventory
700,000
60,000
760,000
Problem 2
Parrot Company provided the following inventory data:
Materials
Production labor cost
Production overhead
General administration cost
Marketing cost
300,000
330,000
120,000
100,000
50,000
What is the value of the completed inventory?
Materials
Production labor cost
Production overhead
Value of completed inventory
300,000
330,000
120,000
750,000
Problem 3
Virtue Company provided the following data for the current year:
Merchandise purchased for resale
Freight in
Freight out
Purchase returns
Interest on inventory loan
4,000,000
100,000
50,000
20,000
200,000
What is the inventoriable cost of the purchase?
Merchandise purchase for resale
Freight in
Purchase returns
Cost of purchase
4,000,000
100,000
(20,000)
4,080,000
Problem 4
Brilliant Company purchased inventory from various countries for export to other countries.
The entity incurred the following costs during the current year:
Cost of purchases based on vendors’ invoices
Trade discounts on purchases already deducted from vendors’ invoices
Import duties
Freight and insurance on purchases
Other handling cost relating to imports
Salaries of accounting department
5,000,000
500,000
400,000
1,000,000
100,000
600,000
Brokerage commission paid to agents for arranging imports
Sales commission
After-sales warranty cost
200,000
300,000
250,000
What is the total cost of the purchases?
Cost of purchase
Import duties
Freight and insurance
Brokerage
5,000,000
400,000
100,000
200,000
5,700,000
Problem 5
Eagle Company incurred the following costs in relation to a certain product:
Direct materials and labor
Variable production overhead
Factory administrative cost
Fixed production cost
180,000
25,000
15,000
20,000
What is the correct measurement of the product?
Direct materials and labor
Variable production overhead
Factory cost
Fixed production cost
180,000
25,000
15,000
20,000
240,000
Problem 6
Marsh Company had 150,000 units of product A on hand at January 1, costing P21 each.
Purchases of product A during the month of January were:
Units
200,000
250,000
100,000
January 10
18
28
Unit cost
22
23
24
A physical count on January 31 shows 250,000 units of product A on hand.
What is the cost of the inventory on January 31 under the FIFO method?
FIFO
Beg. Inv
Purchases:
#1
#2
#3
Total
Cost of Goods available for sale
Units
Cost/unit
COG for
sale
150,000
P21.00
3,150,000
200,000
250,000
100,000
700,000
P22.00
P23.00
P24.00
4,400,000
5,750,000
2,400,000
15,700,000
Units
sold
150,000
Cost of Goods Sold
Cots/unit
COGS
200,000
100,000
Units
P21.00
3,150,000
0
P22.00
P23.00
P24.00
4,400,000
2,300,000
9,850,000
150,000
100,000
450,000
Ending Inventory
Cost/unit
Ending
Inventory
P21.00
P22.00
P23.00
P24.00
250,000
Problem 7
Jayson Company provided the following information.
Jan 1
6
Feb 5
Mar 5
Mar 8
Apr 10
Apr 30
Beginning balance
Purchase
Sale
Purchase
Purchase return
Sale
Sale return
Units
8,000
3,000
10,000
11,000
800
Units cost
70.00
70.50
Total Cost
560,000
211,500
73.50
73.50
7,000
300
If the FIFO cost flow method is used, what is the cost of the inventory on April 30?
808,500
58,800
3,450,000
2,400,000
5,850,000
FIFO
Beg, Inv
Purchases:
06-Jan
05-Mar
Total
Cost of Goods available for sale
Units
Cost/unit
COG for
sale
8,000
P70.00
560,000
Units
sold
8,000
3,000
10,200
21,200
3,000
5,700
16,700
P70.50
P73.50
211,500
749,700
1,521,200
Cost of Goods Sold
Cost/unit
COGS
Units
P70.00
560,000
0
P70.50
P73.50
211,500
418,950
1,190,450
0
4,500
4,500
Ending inventory
Cost/unit
Ending
Inventory
P70.00
P70.00
P73.50
330,750
330,750
Problem 8
Mildred Company is a wholesaler of office supplies. The FIFO is used. The entity reported the following activity for inventory
of calculators during the month of August:
August 1
7
12
21
22
29
Units
20,000
30,000
36,000
48,000
38,000
16,000
Inventory
Purchase
Sale
Purchase
Sale
Purchase
Cost
36.00
37.20
38.00
38.00
What is the ending inventory on August 31?
Aug. 1
Aug. 7
Aug. 21
Aug. 29
Beg
Purch
Purch
Purch
Cost available for sale
Quan.
Rate
Value
20,000
36
720,000
30,000
37.2
1,116,000
48,000
38
1,824,000
16,000
38.6
617,600
Quan
20,000
30,000
24,000
Cost of goods sold
Rate
Value
36
720,000
37.2
1,116,000
38
912,000
74,000
2,748,000
Quan
24,000
16,000
40,000
Inventory
Rate
Value
38
38.6
912,000
617,600
1,529,600
Problem 9
Andrea Company used the weighted average method to determine the cost of the inventory.
During the month of January, the entity recorded the following information pertaining to inventory:
Units
40,000
35,000
20,000
Balance on January 1
Sold on January 17
Purchased on January 28
Unit cost
50
Total cost
2,000,000
80
1,600,000
What amount of inventory should be reported on January 31?
Jan. 1
Jan. 17
Jan. 28
Beg
Sale
Purch
Cost available for sale
Quan
Rate
Value
40,000
50
2,000,000
Quan
35,000
20,000
60,000
80
60
1,600,000
3,600,000
35,000
Cost of goods sold
Rate
Value
60
Quan
Inventory
Rate
Value
2,100,000
2,100,000
25,000
25,000
60
Problem 10
During the month of January, Metro Company recorded the following information pertaining to inventory:
Units
Balance on 1/1
Purchased on 1/7
Sold on 1/20
Purchased 1/25
10,000
100
6,000
9,000
4,000
500
Unit Cost
Total Cost
Units on hand
1,000,000
10,000
300
1,800,000
16,000
7,000
2,000,000
11,000
Under the weighted average method, what amount should Metro report as inventory on January 31?
1,500,000
1,500,000
Date
Qty
01-Jan
07-Jan
20-Jan
25-Jan
Receipts
Rate
Amt
6,000
300
1,800,000
4,000
500
2,000,000
Issues
Rate
Qty
9,000
Amt
175
1,575,000
Unit cost
40
Total cost
400,000
50
750,000
60
1,500,000
Qty
10,000
16,000
7,000
11,000
Balances
Rate
100
175
175
293
Amt
1,000,000
2,800,000
1,225,000
3,225,000
Balances
Rate
40
40
47.50
47.50
59.07
59.07
Amt
400,000
200,000
950,000
95,000
1,595,000
886,1000
Problem 11
Extreme Company showed the following information:
January 1
31
April
1
July
31
October 1
December 31
Units
10,000
5,000
15,000
18,000
25,000
12,000
Beginning
Sale
Purchase
Sale
Purchase
Sale
Under the weighted average method, what amount should be reported as inventory on December 31?
Date
Qty
01-Jan
31-Jan
01-Apr
31-Jul
01-Oct
31-Dec
Receipts
Rate
Amt
15,000
50
750,000
25,000
60
1,500,000
Issues
Rate
Qty
Amt
5,000
40
200,000
18,000
47.50
855,000
12,000
59.07
708,888.89
Qty
10,000
5,000
20,000
2,000
27,000
15,000
Problem 12
Premiere Company showed the following inventory data:
Inventories
Item 1
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Units
1,000
2,000
3,000
4,000
5,000
2,000
2,000
Unit cost Net realizable value
110
100
250
260
300
330
500
480
650
620
800
790
730
780
Determine the valuation of the inventory following the measurement at LCNRV.
Materials
Item 1
Item 2
Item 3
Goods in process
Item 4
Item 5
Finished goods
Item 6
Item 7
Valuation at LCNRV
Units
Cost or NRV
Inventory
1,000
2,000
3,000
100
250
300
100,000
500,000
900,000
4,000
5,000
480
620
1,920,000
3,100,000
2,000
2,000
790
730
1,580,000
1,460,000
9,560,000
Problem 13
The inventory of Hazel Company at the end of the current year is to be recorded at the lower of cost and net realizable value.
Ending inventory data per unit are summarized below:
Items
A
B
C
Units
1,000
1,500
1,200
Cost
120
110
150
Estimated sales price
180
140
170
Cost of disposal
30
20
30
D
E
1,800
1,700
140
130
190
200
30
40
Determine the inventory value applying the lower of cost and net realizable value.
Units
1,000
1,500
1,200
1,800
1,700
A
B
C
D
E
Unit cost
120
110
150
140
130
NRV
150
120
140
160
160
Inventory
120,000
165,000
168,000
252,000
221,000
926,000
Problem 14
Prime Company manufactures and sells four products, the inventories of which are priced at cost or net realizable value
whichever is lower.
A normal profit of 30% is usually maintained on each product.
The following information is compiled at year-end:
Product Original Cost
1
700
2
475
3
255
4
450
Cost to dispose Estimated Selling Price
150
800
205
950
50
300
260
1,000
Normal selling price
700
950
350
900
Determine the unit value for each product applying the LCNRV in measuring inventory
Product
1
2
3
4
Original Cost
700
475
255
450
Cost to Dispose
150
205
50
260
Est. Selling price
800
950
350
1,000
Net realizable
650
745
300
740
Lower of Cost or NRV
650
475
255
450
Problem 15
Preciosa Company provided the following inventory information at year-end:
Units on hand
Unit cost
Net realizable value
Appliances
Product A
Product B
500
300
2,500
3,700
2,700
3,600
Car accessories
Product C
Product D
600
800
1,400
2,100
2,000
2,000
Determine the inventory value at year-end applying the LCNRV measurement
Problem 16
Winter Company provided the following inventory data at year-end:
Skis
Boots
Ski equipment
Ski apparel
Cost
2,200,000
1,700,000
700,000
400,000
NRV
2,500,000
1,500,000
800,000
500,000
What amount should be reported as inventory at year-end
Skis
Boots
Cost
2,200,000
1,700,000
NRV
2,500,000
1,500,000
Inventory at year end
2,200,000
1,500,000
Ski equipment
Ski apparel
700,000
400,000
800,000
500,000
Inventory at year end
700,000
400,000
4,800,000
Problem 17
Based on a physical inventory taken at year-end, Chewy Company determined the chocolate inventory on a FIFO basis at
P5,200,000 with a replacement cost at P4,000,000.
The entity estimated that after further processing cost of P2,400,000, the chocolate could be sold as finished candy bars for
P8,000,000. The normal profit margin is 10% of sales.
Using the measurement at the lower of cost and net realizable value, what amount should be reported as chocolate inventory
at year-end?
8,000,000 – 800,000 – 2,400,000 = 4,800,000
Problem 18
Harlene Company provided the following information for an inventory at year-end:
Historical cost
Estimated selling price
Estimated completion and selling cost
Replacement cost
1,200,000
1,300,000
150,000
1,100,000
What amount should be reported as inventory at year-end?
Estimated selling price
Estimated completion and selling cost
Net realizable value
Replacement cost
1,300,000
150,000
1,150,000
1,100,000
Problem 19
Aloha Company determined the following information for an inventory at year-end:
Historical cost
Current replacement cost
Net realizable value
Net realizable value less a normal profit margin
Fair value
2,000,000
1,400,000
1,800,000
1,700,000
1,900,000
What amount should be reported as inventory at year-end?
Net realizable value less a normal profit margin
Current replacement cost
1,700,000
1,400,000
Theories:
1.
2.
3.
4.
Fixed production overheads include all, except
a. Indirect materials and indirect labor
b. Depreciation of factory building
c. Cost of factory management and administration
Which of the following should be taken into account when determining the cost of inventory?
a. Storage cost of part-finished goods
b. Abnormal freight in
c. Recoverable purchase tax
d. Interest on inventory loan
Which of the following should not be taken into account when determining the cost of inventory?
a. Storage cost of part-finished goods
b. Trade discount
c. Freight cost on purchase
d. Import duty on shipping of inventory inward
Which of the following costs should be included in inventory valuation?
5.
6.
7.
8.
9.
a. Administrative cost
b. Abnormal material usage
c. Storage cost relating to finished goods
d. Fixed production overhead
Which of the following would not be reported as inventory?
a. Land acquired for resale by a real estate firm
b. Shares and bonds held for resale by a brokerage firm
c. Partially completed goods
d. Machinery acquired for use in the production process
Which of the following costs of conversion cannot be included in cost of inventory?
a. Cost of direct labor
b. Factory rent and utilities
c. Salaries of sales staff
d. Factory overhead
The cost of inventories does not include
a. Salaries of factory staff
b. Storage cost necessary in the production process before a further production stage
c. Abnormal amount of wasted material
d. Irrecoverable purchase tax
Costs incurred in bringing the inventories to their present location and condition include
a. Cost of designing products for specific customers
b. Abnormal amount of wasted material, labor and production cost
c. Storage cost not necessary in the production process before a further production stage
d. Distribution cost
Inventories encompass all of the following, except
a. Merchandise purchased by a retailer
b. Land and other property not held for sale
c. Finished goods produced
d. Materials and supplies awaiting use in the production process
10. A property developer must classify properties that it holds for sale in the course of business as
a. Inventory
b. Property, plant and equipment
c. Financial asset
d. Investment property
11. Factory supplies to be consumed in the production process are included in
a. Inventory
b. Property, plant and equipment
c. Investment property
d. Intangible assets
12. Which of the following should not be reported in inventory?
a. Raw materials
b. Equipment
c. Finished goods
d. Factory supplies
13. Why is inventory included in the computation of net income?
a. To determine cost of goods sold
b. To determine sales revenue
c. To determine merchandise returns
d. Inventory is not included in the computation of net income
14. When inventory is misstated, the presentation lacks
a. Relevance
b. Faithful representation
c. Comparability
d. All of the choices are correct
15. Which of the following costs should not be included as part of the cost of inventory?
a. Abnormal freight
b. Import duties
c. Conversion costs
d. All of these are included in inventory
16. Which of the following would not be separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases
b. Cash discounts taken during the period
c. Purchase return and allowances during the period
d. Cost of transportation for merchandise purchased
17. Which of the inventory method measures most closely the current cost of inventory?
a. FIFO
b. Specific identification
c. Weighted average
d. LIFO
18. In a period of declining prices, the inventory method which tends to give the highest amount of cost of goods sold is
a. Specific identification
b. Average cost
c. FIFO
d. LIFO
19. In a period of falling prices, which inventory method provides the lowest amount of ending inventory?
a. Weighted average
b. Moving average
c. FIFO
d. Specific identification
20. In a period of rising prices which inventory method provides the highest amount of net income?
a. Weighted average
b. Moving average
c. FIFO
d. Specific identification
21. Net realizable value is
a. Current replacement cost
b. Estimated selling price
c. Expected selling price less expected cost to complete and expected cost of disposal
d. Estimated selling price less estimated cost to complete and estimated cost of disposal
22. Inventories are usually written down to net realizable value
a. Item by item
b. By classification
c. By total
d. By segment
23. The amount of any writedown of inventory to net realizable value is
a. Recognized as operating expense
b. Recognized as other expense
c. Deferred until the related inventory is sold
d. Recognized as component of cost of goods sold
24. How should sales staff commission to dealt with when measuring inventory at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at net realizable value
d. Deducted from cost
25. How should trade discounts be dealt with when measuring inventory at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at net assets
d. Deducted at arriving at cost
26. How should prompt payment discount be dealt with when measuring inventory at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at net realizable value
d. Deducted from cost
27. Which of the following is not an acceptable method of applying LCNRV?
a. Inventory location
b. Group inventory
c. Individual item
d. Total inventory
28. LCNRV of inventory
a. Is always either the net realizable value or cost
b. Should always be equal to net realizable value
c. May sometimes be less than net realizable value
d. Should always be equal to estimated selling price
29. Lower of cost and net realizable value
a. Gives the lowest valuation of applied by total
b. Gives the lowest valuation if applied by major group
c. Gives the lowest valuation if applied individually
d. Must be applied to major group
30. Lower of cost and net realizable value as it applies to inventory is best described as
a. Reporting of a loss when there is a decrease in the future utility below the original cost
b. Method of determining cost of goods sold
c. Assumption to determine inventory flow
d. Change in inventory value to net realizable value
31. When the allowance method is used to record inventory at net realizable value
a. There is a direct reduction in the selling price
b. A loss is recorded separately
c. The net realizable value for ending inventory is substituted for cost and the loss is buried in cost of goods sold
d. A loss on inventory writedown is not recognized.
32. Which statement is true regarding inventory writedown and reversal of writedown?
a. Reversal of inventory writedown is probihited
b. Separate reporting of reversal of inventory writedown is required
c. Entities are not required to recognize writedown in inventory
d. All of the choices are correct