FAR 06-04: Inventories (IAS 2)
Assets included as Inventories:
1.) Finished Goods (Manufacturers) or Merchandise Inventory (Retailers)
2.) Work in Process Inventory
3.) Raw Materials and Supplies
Cost of Inventories:
Net Selling Price = Invoice Price
Cost of Purchase
Cost of Conversion
Non manufacturing Overhead (Catch all) (i.e., Freight on
Consigned Goods)
Buyback Agreement
Special Order
Invoice Price = List Price less Trade Discount and
Rebates (not recorded)
X Sale
Direct Labor
✓ Loan
Finished and Segregated
- Excluded
Can’t be revert back to
Inventory
Cost of Conversion
Fixed
Overhead
Variable
Scenario: Merchandise sold; billed but not yet
shipped
IAS 2
Merchandise sold; Shipping Terms: FOB Shipping Point
Cut off: December 31, 2023
Billed: December 30, 2023
Inventories should be measured at Lower of Cost, and
Net Realizable Value (LCNRV)
- Applied item by item approach
- Benchmark: Loss or Allowance Method
If specific cost is not determinable, the benchmark
treatment is to use either the FIFO or weighted average
cost formulas.
Shipped: January 5, 2024
Physical Count: Included
Proper Treatment: Include!
Net Realizable Value (NRV)
Why? It is not yet shipped even tho billed on an earlier
date.
Est. Selling Price
Less: Cost to Complete
Cost to Sell
NRV
BS Presentation
Inventory
XXX
Less: Allowance on Inventory Write-down
XXX
Inventory - NRV
XXX
XXX
XXX
XXX
XXX
XXX
COGS (Indirect Method Formula):
COGS (Direct Method Formula):
TGAS
XXX
TGAS (BI @ LCNRV + Purchases)
XXX
Less: Ending Inventory @ Cost
XXX
Less: Ending Inventory @ LCNRV
XXX
COGS before Adjustment
XXX
COGS
XXX
+ Loss / - Gain on Reversal
XXX
COGS after Adjustment
XXX
Purchase Commitment (Problem Example)
Data provided:
• PC Contract Date: November 15, 2022
• PC: 100,000 barrels for P55.00 on March 31, 2023
• PC: P53.00 per barrel
• December 31, 2022 (BS Date): P51.00
• March 31, 2023 (Date of Delivery): P57.00
Gain from Recovery (Succeeding Year) Journal Entry
Allowance on Inventory Write-down
Gain on Reversal
November 15, 2022 (@55)
Contract Date – no entry
Legal Transaction only
XXX
XXX
December 31, 2022 (@51)
March 31, 2023 (@57)
Purchases (cannot exceed PC) 5,500,000
Est. Liability on PC
400,000
Cash (100,000 x P55)
5,500,000
Gain on Recovery
400,000
Loss
400,000
Estimated Liability on PC
400,000
[(55-51) x 100,000]
Estimated Inventory under GP Method
Goods Available for Sale
XXX
Less: Estimated Cost of Goods Sold:
Net Sales*
Less: Gross Profit
XXX
XXX
Estimated Ending Inventory
XXX
XXX
Or Estimated COGS = Net Sales x Cost Ratio
*if the problem is silent, based on sales
If the GP rate is based on cost, cost is equal to 100% and the SP% is GP% + 100%.
Based on Sales
Based on Cost
Sales
100%
XXX%
Cost
(XXX%)
(100%)
Gross Profit
XXX
Net sales based on…
Regular Sales
Gross Sales
Less: Sales Returns and
XXX
Allowances
Sales Returns
(if presented separately)
Sales Allowance
Sales Discount
Note: If Historical Data are given and no explicit GP
rate is present – compute the AVERAGE GP.
NET SALES
For Estimation
Gross Sales
Less: Sales Returns and
Allowances
Sales Returns
(if presented separately)
NET SALES
Sales Discounts and Sales Allowances – IGNORED
Retail Method of Determining Estimated Ending Inventory (Cost Ratio)
1.) Conservative Approach
Lowest
2.) Average Approach
Silent
3.) FIFO Approach
Beginning Inventory is excluded
Formula:
Goods Available for Sale @ Retail
Less: Net Sales*
Employee Discount
Normal Losses
XXX
Same with GP Method
XXX
XXX
XXX
XXX
Estimated Ending Inventory @ Retail
XXX
Multiply by: Cost Ratio
XXX
Estimated Ending Inventory @ Cost
XXX
TGAS @ Cost
Ending Inventory @ Cost
Cost of Goods Sold
XXX
(XXX)
XXX
GAS after Net Mark-down
Formula for Cost Ratio:
Cost
Retail
Beginning Inventory
XXX
XXX
Purchases
XXX
XXX
Freight-In
XXX
Purchase Discount
(XXX)
Purchase Returns and Allowances
(XXX)
(XXX)
XXX
XXX
(XXX)
(XXX)
Departmental Transfer-In
Departmental Transfer-Out
Additional Mark-up
XXX
Mark-up Cancellation
GAS after Net Mark-up
Note:
Abnormal Losses are
deducted
(XXX)
XXX
Mark-down
XXX
Cost Ratio
(Conservative Method)
(XXX)
Mark-down Cancellation
XXX
GAS after Net Mark-down
XXX
XXX
Less: Beginning Inventory
(XXX)
(XXX)
GAS for FIFO Computation
XXX
XXX
Cost Ratio
(Average Method)
Cost Ratio
(FIFO Method)
BIOLOGICAL ASSETS (IAS 41)
Definition of Terms
Agricultural Activity
Is the management by an entity of the biological transformation of biological assets for
sale, into agricultural produce, or into additional biological assets.
Agricultural Produce
Is the harvested product of the entity’s biological assets
Biological Asset
Is a living animal or plant
Biological
Transformation
Comprises the processes of growth, degeneration, production, and procreation that
cause qualitative or quantitative changes in a biological asset
Harvest
Is the detachment of produce from a biological asset or the cessation of a biological
asset’s life processes
Bearer Plant
A living plant that:
a. Is used in the production process of agricultural produce
b. Is expected to bear produce for more than one period
c. Has a remote likelihood of being sold (except as part of incidental scrap sales)
*Dual Purpose Plant (i.e., Rubber Plant) – not a bearer plant
Due to difficulty of measuring BP at FV – C2S, BP is now classified as PPE and
measured at either cost model or revaluation model.
Initial Recognition
An enterprise should recognize a biological asset or agricultural produce only when:
a.
b.
c.
The enterprise controls the assets as a result of past events,
It is probable that future economic benefits will flow to the enterprise, and
The fair value or cost of the asset can be measured reliably.
The gain on initial recognition of biological assets at FV, and the changes in FV of BA during a period are
reported in net P/L.
The gain on initial recognition of agricultural produce at FV should be included in net P/L for the period which it
arises.
All costs related to bio assets that are measured at FV are recognized as expense when incurred, other than costs
to purchase bio assets.
Measurement Principles
Biological Assets
Should be measured on initial recognition and at subsequent reporting dates at fair value
less cost to disposal, unless fair value cannot be reliably measured (Cost Model).
Agricultural Produce
Should be measured at fair value less cost to disposal at the point of harvest
Measurement of Biological Assets at BS Date
Measured at fair value less cost to disposal
The adjustment of fair value less cost to disposal is recognized in Profit or Loss
This shall not apply to Agricultural Produce since they are Inventory (IAS 2)
Step 1: Compute the Carrying Amount
Units x Age at the BS Date x FVLCTS at BS Date
Step 2: Compute the Carrying Amount before FV Adjustment
Units x Age at the Beginning x FVLCTS at the Beg or Purchase or New Born
Step 3: Compute Gain on FV
[Carrying Amount (Step 1) – Carrying Amount before FV Adjustment (Step 2)] + Gain on New Born
Step 4: FV w/o Physical Improvements
Units x Age at the Beginning x FVLCTS at BS Date
Step 5: Compute for Price Change
FV w/o Physical Adjustment (Step 4) – CA before FV Adjustment (Step 2)
Step 6: Compute for Physical Change (Residual Approach)
Gain on FV (Step 3) – Price Change (Step 5)