
INTERMEDIATE ACCOUNTING
1:
INVENTORIES
NATURE OF INVENTORIES
According to IAS 2 (PAS 2):
 INVENTORIES are asset that are:
o held for sale in the ordinary course of
business.
o in the process of production for such
sale (or)
o in the form of materials or supplies to
be consumed in the production process
or in the rendering of services.
COST OF INVENTORIES
COST SHOULD INCLUDE ALL:
 costs of purchase
o (including taxes, transport, and
handling)
o net of trade discounts received.
 costs of conversion
o (including
fixed
and
variable
manufacturing overheads)
 other costs incurred in bringing the
inventories to their present location and
condition.
THE COST OF INVENTORIES IS ASSIGNED BY:
(International Financial Reporting Standards Foundation, 2018):
 SPECIFIC IDENTIFICATION OF COST
o for items of inventory that are not
ordinarily interchangeable. (and)
 FIRST-IN, FIRST-OUT OR WEIGHTED
AVERAGE COST FORMULA
o for items that are ordinarily
interchangeable (generally large
quantities of individually insignificant
items).
IAS 23 (PAS 23)
 BORROWING COSTS
o identifies some limited circumstances
where borrowing costs (interest) can
be included in the cost of inventories
that meet the definition of a Qualifying
Asset.
 INVENTORY COST
o should not include:
 abnormal waste
 storage costs
administrative overheads
unrelated to production
 selling costs
 foreign exchange differences
arise directly on the recent
acquisition of inventories invoiced
in a foreign currency.
 interest cost when inventories
are purchased with deferred
settlement terms.
SAME COST FORMULA
 should be used for all inventories with
similar characteristics as:
o to their nature (and)
o use to the entity.
 For groups of inventories that have
different characteristics
o DIFFERENT COST FORMULAS
may be justified.
CLASSIFICATION OF INVENTORIES
CLASSIFICATION OF INVENTORIES
 varies depending on the type of business
the firm is involved with.
MERCHANDISING TYPE OF BUSINESS
 its inventory usually comes from its
purchases.
 This account is usually termed as
MERCHANDISE INVENTORY.
o which is the sole item of inventory
appearing
in
the
Financial
Statement.
MANUFACTURING TYPE OF BUSINESS
 produce goods to sell to merchandising
forms.
 MANUFACTURERS normally have three
(3) inventory accounts:
o RAW MATERIALS INVENTORY
 goods and materials on hand
not
yet
placed
into
production.
o WORK-IN-PROCESS INVENTORY
 The cost of the unfinished
product or goods is still
under
the
production
process.
 The COST OF THESE UNITS
comprises:
 direct labor cost
applied.
 manufacturing
overhead cost.
o
FINISHED GOODS INVENTORY
 completed but unsold units on
hand.
GOODS INCLUDED IN INVENTORY
1. GOODS IN TRANSIT
 Companies purchase merchandise that
remains in transit at the end of the
fiscal period.
 Proper accounting for these goods
depends on who has the control over
the goods.
 The PASSAGE OF TITLE RULE is
applicable in this situation.
2.
SHIPPING TERMS essential in identifying the
legal title over the goods:
3.
A. FOB SHIPPING POINT
a. The title passes to the BUYER the
moment:
 seller DELIVERS THE
GOODS to the common
carrier, (acts as an agent
for the buyer.)
B. FOB DESTINATION
a. The title passes to the BUYER only
when:
 it RECEIVES THE GOODS
from the common carrier.
C. FREE ALONGSIDE (FAS)
a. The risk of loss is transferred
FROM THE SELLER TO THE
BUYER
 at a named port alongside a
vessel designated by the
buyer.
D. COST, INSURANCE, AND FREIGHT
a. Under this shipping contract, the
BUYER agrees to pay all the cost of
goods, insurance cost, and freight.
b. The risk of loss is transferred to
the buyer.
 upon delivery of goods to
the carrier.
4.
5.
6.
a. carrier will collect the cost of
transporting the goods to the
BUYER.
B. FREIGHT PREPAID
a. freight cost on the goods shipped is
already paid by the SELLER.
CONSIGNED GOODS
 Goods
under
CONSIGNMENT
ARRANGEMENT.
o Under this arrangement, a
COMPANY (THE CONSIGNOR)
ships various art merchandise to
ANOTHER COMPANY (THE
CONSIGNEE), who acts as agent
in selling the consigned goods.
o These goods remain the
property of the consignor.
SEGREGATED GOODS
 Specially ordered or manufactured
goods
o based on the customer’s
preference.
 Once completed, shall be considered
sold and excluded from the inventory
of the seller.
CONDITIONAL SALE AND INSTALLMENT
SALE
 The title has already passed to the
buyer.
GOODS
SOLD
WITH
BUYBACK
AGREEMENT
 Goods are still part of the inventory of
the seller.
GOODS SOLD WITH REFUND OFFERS
 If returns are predictable
o goods are excluded from the
inventories of the seller
 If not
o retained as part of the inventory.
SYSTEMS OF RECORDING INVENTORIES
Companies usually use one of the TWO (2) TYPES
OF SYSTEMS.
 for maintaining inventory records for
the cost of inventories
o PERPETUAL SYSTEM
o PERIODIC SYSTEM
FREIGHT TERMS
A. FREIGHT COLLECT
PERPETUAL
PERIODIC
RECORDING
Inventory Records –
updated REGULARLY.
Determination of
ENDING
INVENTORY
STOCK COUNT
Ending Inventory –
basis of INVENTORY
RECORDS.
Done to CONFIRM – if
units held as PER
RECORD.
HIGH LEVEL OF
CONTROL
as management knows
the quantity at any
given time.
CONTROL ON
INVENTORY
TEMPORARY
ACCOUNTS
Inventory Records –
updated
PERIODICALLY.
Ending Inventory –
basis of PHYSICAL
STOCK COUNT.
Done to DETERMINE –
the COST OF GOODS
SOLD
NO CONTROL
management is
unaware of quantity
until the end of the
period.
NO TEMPORARY
ACCOUNTS
Recording – done
directly
in
INVENTORY
ACCOUNT.
TEMPORARY
ACCOUNTS
(ex. Purchases,
returns and sales)
Maintained
that
are
CLOSED at the PERIOD
END.
EXPENSIVE to
maintain.
Need DEDICATED,
TRAINED personnel.
CHEAPER to maintain.
Requires LESS WORK
and WORKFORCE.
COST
INVENTORY COSTING METHODS
UNDER PERIODIC AND PERPETUAL SYSTEMS
A. SPECIFIC IDENTIFICATION
 a method of tracking inventory items
by assigning a specific cost associated
to it.
o from the point of purchase to
the point of sale.
B. FIFO METHOD
 termed as first in, first out method.
 This method implies that the ENDING
INVENTORY
o comprises
the
later
purchases/production made by
the company.
C. LIFO METHOD
 Although the IAS 2 does not permit the
use of this method.
 This Last in, First Out method
 implies that the ENDING INVENTORY
o comprises
the
earlier
purchases/ production.
D. WEIGHTED AVERAGE METHOD
 uses the mixture of methods stated
above.
INVENTORY VALUATIONS
IAS 2
 guides in determining the:
o cost of inventories
o
subsequent recognition of the cost
as an expense.
 including any write-down to
net realizable value.
 It also provides guidance on the COST
FORMULAS
o that are used to assign costs to
inventories.
INVENTORIES
 measured at the lower of cost and net
realizable value (LCNRV).
NET REALIZABLE VALUE
 estimated selling price in the ordinary
course of business less the estimated
costs of completion and the estimated
costs necessary to make the sale
(International Financial Reporting Standards Foundation,
2018).
COST OF INVENTORIES
 includes:
o all costs of purchase
o costs of conversion (direct labor and
production overhead)
o other costs incurred in bringing the
inventories to their present location
and condition.
 When inventories are sold, the CARRYING
AMOUNT OF THOSE INVENTORIES is:
o recognized as an expense in the
period in which the related
revenue is recognized.
 The amount of ANY WRITE-DOWN OF
INVENTORIES to net realizable value and
ALL LOSSES OF INVENTORIES are:
o recognized as an expense in the
period the write-down or loss
occurs (International Financial Reporting
Standards Foundation, 2018).