Chapter 7 Inventories Introduction Inventories are assets: a. Held for sale or distribution in the ordinary course of operations (finished goods) b. In the process of production for sale or distribution (work in process); or c. In the form of materials or supplies to be consumed in the production process or distributed in the rendering of services (raw materials and supplies) More specifically, the inventories of a government entity consist of the following: a. Inventory Held for Sale (e.g., medicines for sale in government pharmacies) b. Inventory Held for Distribution (e.g., rice and other welfare goods held for distribution) c. Inventory Held for Manufacturing (e.g., raw materials, work- in-process) d. Inventory Held for Consumption (e.g., office supplies inventory) e. Semi-Expendable Property — consists of machinery, equipment, furniture and fixtures and similar items that are not capitalized as PPE because their costs are below theP15,000 capitalization threshold for PPE. Measurement Inventories are initially measured at cost and subsequent measured as follows: Goods held for sale -Lower of Cost and Net realizable value. Goods held or distribution -Lower of cost and current replacement cost. Cost comprises the following: a. Purchase cost, excluding trade discounts, rebate, and other similar deductions in purchase price. b. Direct costs incurred in bringing the asset to its intended location and condition (e.g., freight costs, conversion costs- such as costs of labor and production overhead for manufactured items). Cost excludes the following: a. Abnormal amounts of wasted materials, labor, and production overhead; b. Selling costs; and c. Administrative overheads Exceptions: a. Inventories received from non-exchange transaction (e.g., donations) are initially measured at acquisition-date fair value. b. Agricultural produce are initially measured at fair value less cost to sell at the point of harvest. For these items, their initial measurements are deemed their costs for purposes of subsequent measurement at the lower of cost or NRV/Current replacement cost. Net Realizable Value (NRV) estimated selling price less estimated costs of completion and estimated selling/disposal costs. Current replacement cost is the cost the entity would incur to acquire the asset on the reporting date. Cost Formula Cost of goods sold and cost of inventories on hand are determined using the following cost formulas: a. Specific identification- this shall be used for items that are not ordinarily interchangeable (i.e., unique) and those that are segregated for specific projects. Under this formula, specific cost are attributed to identified items of inventory. Accordingly, cost of sales represents the actual costs of the specific items sold while ending Inventory represent the actual costs of the specific items on hand. b. Weighted average cost— this shall be used for large numbers of items of inventory that are ordinarily interchangeable. This shall be applied under perpetual inventory system Under this formula, a new weighted average unit cost is computed after every purchase. The computed average costs are used in determining the cost of goods sold and inventory on hand. Accordingly, cost of sales and ending inventory are stated at average costs, rather than at the actual costs of the inventories sold or on hand. This method is commonly referred to in traditional accounting by business entities as the "moving average" cost formula. Government entities shall use the perpetual inventory system. Under this system, purchase, sales, and other transactions affecting inventory are recorded in the "inventory" and “cost of sales" accounts, as appropriate. Moreover, stock cards and stock ledger are maintained. These enable the retrieval of information on costs and quantities of inventories sold and on hand at any given point of time. However, purchases of supplies and materials out of the petty cash fund for immediate use or on emergency cases are charged directly as expense. The FIFO cost formula and the periodic inventory system are not used by government entities. Recognition as an Expense The carrying amount of an inventory recognized as expense in the period it is sold, distributed, exchanged, or consumed. The write-down of inventory to its NRV or Current replacement cost, as appropriate, is also recognized as expense. Receipt and Disposition of Inventories Receipt 1. End users prepare the Purchase Request (PR) form to request for the purchase of items not available on stock. The PR is the basis in preparing the Purchase Order. End users refer to the individuals who will actually be using the items. For example, the end users of office supplies are those who are working in the office; the end users for cleaning materials are the janitors. As an internal control, only the appropriate end users are allowed to make purchase requests for the items they need. It would be inappropriate for an office clerk to make a purchase request for cleaning materials. 2. The authorized official prepares the Purchase Order (PO). The PO is a document issued to the supplier when making a purchase. It indicates the specifications, quantities, and agreed prices of the items being purchased. The PO serves as contract between the entity and the supplier. Recall that a canvass from at least 3 suppliers is required for purchases amounting to PI, OOO and above. 3. When the purchased items are delivered, the Property/Supply Division signs the "received" portion of the Delivery Receipt (DR) and prepares the Inspection and Acceptance Report (IAR). The IAR will be used by the Property Inspector in inspecting and accepting the delivered items. The Property/Supply Division forwards the DR, IAR and PO to the Property Inspector. 4. The Property Inspector inspects the conformance of the delivered items with the specifications in both the PO and DR and indicates the result of the inspection (i.e., acceptance or rejection) in the IAR. Rejected deliveries will be returned to the supplier. The Property Inspector forwards the copies of DR, IAR and PO to both the Property/ Supply Division and Accounting Division for recording. 5. The Property/Supply Division, through the Stock Card Keeper, records the accepted deliveries in the Stock Card (SC)The SC shows the of all receipts and issuances of inventory, as well as the available balance at any given point of time. 6. The Accounting Division records the accepted deliveries in the books of accounts and in the Supplies Ledger Card (SLC). The SLC shows both the quantities and monetary amounts of all receipts and issuances of inventory, as well as the available balance at any given point of time. As an internal control, the SC (maintained by the Property/Supply Division) and SLC (maintained by the Accounting Division) are periodically reconciled. 7. The Property/Supply Division prepares the Disbursement Voucher (DV) then forwards it, together with supporting documents, to the Accounting Division for processing of payment. Disposition 8. End users prepare the Requisition and Issue Slip (RIS) to request for the issuance of items available on stock. The Head of the requesting individual shall approve the RIS. The approved RIS is then forwarded to the Property/Supply Division. 9. The Property/Supply Division prepares the Report of Supplies and Materials Issued (RSMI). The RSMI will be used by the Stock Card Keeper in updating the SC and the Accounting Division in journalizing the items issued. 10. The Accounting Division records the items issued in the books of accounts and updates the SLC. 11. The following are other documents used in the disposition of inventories: a. Waste Materials Report — prepared by the Property or Supply Custodian to report wasted materials, such as destroyed spare parts and other spoilages. b. Report on the Physical Count of Inventories — used in reporting the results of physical counts. It shows the balance of inventory, as well as any shortages or overages. c. Report of Accountability for Accountable Forms — used to report the movement and status of accountable forms in the possession of an officer. d. Inventory Custodian Slip — prepared when issuing semi- expendable property. Chapter 7 Summary: The inventories of government entities include the following: Inventory Held for Sale, Inventory Held for Distribution (e.g., welfare goods held for distribution), Inventory Held for Manufacturing, Inventory Held for Consumption (e.g., office supplies), and Semi-Expendable Property (PPE-like items below the P15,000 capitalization threshold for PPE). Goods held for sale are subsequently measured at the Lower of Cost and NRV while goods held for distribution are subsequently measured at the Lower of Cost and Current replacement cost. The FIFO cost formula and the Periodic inventory system are not used by government entities.
