CONCEPTUAL FRAMEWORK & ACCOUNTiNG STANDARDS
CHAPTER 2: INVENTORIES
INVENTORIES COST FORMULAS
Inventories are as assets: The cost formulas deal with the
a. Held for sale in the ordinary course of computation of cost of inventories that are
business finished gods; charged as expense when the related revenue si
b. In the process of production for such sale recognized (i.e., ‘cost of sales' or 'cost of goods
(work in process); or sold') as well as the cost of unsold inventories at
c. In the form of materials or supplies to be the end of the period that are recognized as asset
consumed in the production process or in (i.e., 'ending inventory').
the rendering of services (raw materials 1. Specific identification - under this
and manufacturing supplies). formula, specific costs are attributed to
identified items of inventory. Accordingly,
EXAMPLES OF INVENTORIES: cost of sales represents the actual costs of
a. Merchandise purchased by a trading entity the specific items sold while ending
and held for resale. inventory represents the actual costs of
b. Land and other property held for sale in the specific items on hand.
the ordinary course 2. First-In, First-Out (FIFO) - under this
of business. formula, it is assumed that inventories that
c. Finished goods, goods undergoing were purchased or produced first are sold
production, and raw materials and first, and therefore unsold inventories at
supplies awaiting use in the production the end of the period are those most
process by a manufacturing entity. recently purchased or produced.
3. Weighted Average - under this formula,
MEASUREMENT cost of sales and ending inventory are
Inventories are measured at the lower of determined based on the weighted
cost and net realizable value. average cost of beginning inventory and al
inventories purchased or produced during
COST the period. The average may be
The cost of inventories comprises the calculated on a periodic basis, or as each
following: additional purchase is made, depending
a. Purchase cost - this includes the upon the circumstances of the entity.
purchase price (net of trade discounts and
other rebates), import duties, non- NET REALIZABLE VALUE (NRV)
refundable or non-recoverable purchase Net realizable value is the estimated
taxes, and transport, handling and other selling price in the ordinary course of business
costs directly attributable to the acquisition less the estimated costs of completion and the
of the inventory. estimated costs necessary to make the sale.
b. Conversion costs - these refer to the
costs necessary in converting raw RECOGNITION AS AN EXPENSE
materials into finished goods. Conversion The carrying amount of an inventory that
costs include the costs of direct labor and is sold is charged as expense (i.e., cost of sales)
production overhead. in the period in which the related revenue is
c. Other costs necessary in bringing the recognized. Likewise, the write-down of
inventories to their present location and inventories to NRV and al losses of inventories
condition. are recognized as expense in the period the
write-down or loss occurs.
DISCLOSURES
a. Accounting policies adopted in measuring
inventories, including the cost formula
used;
b. Total carrying amount of inventories and
the carrying amount in classifications
appropriate to the entity;
c. Carrying amount of inventories carried at
fair value less costs to sell;
d. Amount of inventories recognized as an
expense during the period;
e. Amount of any write-down of inventories
recognized as an expense in the period;
f. Amount of any reversal of write-down that
is recognized as a reduction in the amount
of inventories recognized as expense in
the period;
g. Circumstances or events that led to the
reversal of a write-down of inventories;
and
h. Carrying amount of inventories pledged as
security for liabilities.