189 invelitOries Chapter 7 Inventories learning Objectives 1. Account for inventories by a government entity. 2. Describe the procedures in the receipt and disposition of inventories by a government entity. 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 consists 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, workin-process) d. Inventory Held for Consum ption (e.g., office supplies inventory) e. Sem i- Ex pe nda bl e Pro pe rt y — co nsi st s o f m ac hi ner y, equipment, furniture and fixtures and similar items that are not capitalized as PPE because their costs are below the P15,000 capitalization threshold for PPE. 1 '1 Measurement Inventories are initially m ea sur ed at c o s t a n d sub se quentlY measured as follows: (-toot's heidior saie Lower of Cost and Net realizable value Goods held or distrib ution re lacement cost Lower of Cost and Curr en Cost comprises the following: a. Purchase cost, excluding trade discounts, rebates, 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 f o r 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 transactions (e-g., donations) are initially measured at acquisition-datefair value. b. Agricultural produce are initially measured at fair value k'-'s costs to sell at the point of harvest. For the items, their initial measurements are deem' their costs for purposes of subsequent measurement at the lower cost or NRV/Current rephicemetti Cost. less e N e t R e a l i z a b l e V a l u e M k V ) is estimated selling Pric osts' estimated costs of completion and estimated sellingiclisposar to u Current replacement cost is the cost the entity would. W acquire the asset on the reporting date. 191 Cost Formulas Cost of goods sold and cost of inventories on hand are determined the following cost formulas: using a. specific identifica ti on this shall be used for items that are not ordinarily interchangeabl e (i.e., unique) and those that are segregated for specific projects. Under this formula, specific costs are attributed to identified items of inventory. Accordingly, cost of sales represents the actual costs of the specific items sold while ending inventory represents the actual costs of the specific items on hand. • — Weighted average cost — this shall be used for large numbers b. of items of inventory that are ordinarily interchangeable. This shall be applied under a 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. entities shall use the perpetual inventory s y s t e m . Un der th is sy s tem , p u r ch ase s, sale s, an d o th er transactions affecting inventory are recorded in the "inventory" and "cost of sales" accounts, as appropriate. Moreover, stock cards an. d stock ledgers 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 a nd materials out of the petty cash fund for immedia r O te u s e o n Government emer gency cases are charged directly as expense.. The FIFO cot . formula and the periodic inventory system are not used by government entities. Nitisoo‘ Recognition as an Expense The carrying amount of an inventory is recognized as expense in the period it is sold, distributed, exchanged, or consumed. rChe write-down of inventory to its NRV or Current replacement cost, as appropriate, is also recognized as expense. Illustration: Entity A acquires inventory for P1,000, on account. Semi-Expendable Machinery 1K Accounts Payable 1K inventory Held for Sale Merchandise Inventory Accounts Payable 1K 1K _iventory Held for Distribution Inventory Held for Manufacturing Welfare Goods for Distribution 1K Raw Materials Inventory Accounts Payable Accounts Payable 1K 1K Semi-Expandable Property 1K inventory Held for Consumption Office Supplies Inventory Accounts Payable 1K 1K Entity A recognizes the cost of inventory of P800 as expense. Inventory Held for Sale Cost of sales 800 Merchandise Inventory 800 Invento Held or Manu acturin (see separate entries below) I Semi-Expandable Property x S emi-Expendable machinerytoemi-ExpendableMachinery e _____________ t end-users and Equipment Expenses 800 . , Semi-Expendable Machinery 800 To recognize the issuance of semi- Inventory Held for Distribution Welfare Goods Expense 800 Welfare Goods for ___ Distribution _____________ 800 invento Held or Consum tion Office Supplies Expense 800 Office Supplies Inventory 800 l f i zOt ( 1 r i e s inventory lieldfrr 2K 1Vor „ ' ) Alattufacturin Cost of Sales Matei lois Invenlory Raw ti00 To recoismize cost of sales of 900 Manufacturing Overhead 300 ished goods To recognize iransfer of raw materials, direct labor and manufacturiiN ovethead to lroduction process Finished Goods Inventory 2K Work-Process-Inventory 2K To recognize transfer of completed units to niched oods Inventories costing P200 are found to have a net realizable value of P150 and current replacement cost of P180. Inventory Held for Sale Impairment Loss-Inventories Merchandise Inventory 50 , 50 Inventory Held for Distribution Impairment Loss-Inventories Welfare Goods for. Distribution 20 20 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 he 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, ouly 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. Finished 194 The authori/ed official prepares the Purchwie Order (W?O). The PC) is a document issued to the supplier w h, i n r m i k i n g a purkThase.-11 indicates the specifications, quanti het ,/ and agreed prices of the items being purchased. The P() serves as the contract between the entity and the supplier. Recall that a canvass from at least 3 suppliers is required for purchases amounting to P1,000 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 (LAR). The IAR will be used by the Property Inspector in inspecting and accepting the delivered items. The Property/Supply Division forwards the DR, 1AR 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, JAR 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 (S1)., The SC shows the quantities of all receipts and issuances .°1 inventory, as well as the available balance at any given rou' t of time. 6. The Accounting Division records the accepted deliveries in the books of accounts and in the Supplies Ledger Card (SLO. Tho SLC shows both the quantities and monetary amounts of ble receipts and issuances of inventory, as well as the availa balance at any given point of time. 195 As an internal control, the Sc (maintained by the p ro perty/SuPPIY Di vision) and SLC (maintained by the Accounting Division), peiodically reconciled. Th e Proper( '/Supply Division prepares the Disbursement 7, voucher (DV) then forwards it, together with supporting documents, to the Accounting Division forprocessing of payment. Dispositioil 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 frt . Accountable Forms used to report the movement and status of accountable forms in the possession of an officer. - - 140 d. inventory Custodian Slip — pre larcd when e\pentiabie 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.
