CHAPTER 14: PAS 2 Inventories
Definition
Inventories are assets held for sale in the ordinary course of business, in the process of production in
such sale or in form of materials or supplies to be consumed in the production process or in the
rendering of services.
Classes of Inventories
Inventories are broadly classified into two, namely inventories of a trading concern and inventories of
manufacturing concern.
A trading concern is one that buys and sells goods in the same form purchased.
The term “merchandise inventory” is generally applied to goods held by a trading concern.
A manufacturing concern is one that buys goods which are altered and converted into another term
before they are made available for sale.
The inventories of a manufacturing concern are:
a. Finished goods
b. Goods in process
c. Raw materials
d. Factory or manufacturing supplies
Definition
Finished goods are completed products which are ready for sale.
Goods in process or work in process are partially completed products which required further process or
work they can be sold.
Raw materials are goods that are to be used in the production process.
Frequently raw materials are restricted to materials that will physically incorporated in the production
of other goods and which can be traced directly to the end product of the production process.
Factory or manufacturing supplies are similar to raw materials but their relationship to the end product
is indirect.
Factory or manufacturing supplies may be referred to as indirect materials.
Goods includible in the inventory
As a rule, all which the entity has title shall be included in the inventory, regardless of location.
The phrase “passing of title” is a legal language which means “the point of time which ownership
changes”.
Legal test
Is the entity the owner of the goods to be inventoried?
If the answer is affirmative, the goods shall be included in the inventory.
If the answer is negative, the goods shall be excluded from the inventory.
Who is the owner of the goods in transit?
This will depend on the terms, whether FOB destination or FOB shipping point. FOB means free on
board.
Under FOB destination, ownership of goods purchased is transferred only upon receipt of the goods by
the buyer at the point of destination.
Thus, under FOB destination, the goods in transit are still the property of the seller.
Accordingly, the seller shall legally responsible for freight charges and other expenses up to the point of
destination.
On the other hand, if the term is FOB shipping point, ownership is transferred upon shipment of the
goods and therefore, the goods in transits are properties of the buyer.
Accordingly, the buyer shall legally responsible for freight charges and other expenses point of shipment
to the point of destination.
Freight terms
Freight collect – this means that the freight charges on the goods shipped is not yet paid. The common
carrier shall collect the same from the buyer. Thus, under this, the freight charge is actually paid by the
buyer.
Freight prepaid – this means that the freight charges on the goods shipped is already paid by the seller.
The term “FOB destination” and “FOB shipping point” determine the ownership of the goods in transit
and the party who is supposed to be paid the freight charge.
Consigned goods
A consigned goods is a method of marketing goods in which the owner called the consignor transfers
physical possession of certain goods to an agent called consignee who sells them on the owner’s behalf.
Consigned goods shall be included on the consignor’s inventory and excludes in the consignee’s
inventory.
Freight and other handling charges on goods out on consignment are part of the cost of goods
consigned.
When consigned goods are sold by the consignee, a report is made to the consignor together with a cash
remittance for the amount of sales minus the commission and other expenses chargeable to the
consignor.
For example, a consignee sells consigned goods for P100,000. This amount is remitted to the consignor
less the commission of P15,000 and advertising of P2,000.
The consignor simply records the remittance from the consignee as follows:
Cash 83,000
Commission 15,000
Advertising 2,000
Sales 100,000
Incidentally, consigned goods are recorded by the consignor by means of a memorandum entry.
Statement presentation
Inventories are generally classified as current assets.
The inventories shall be presented as one line item in the statement of financial position but the details
of the inventories are disclosed in the notes to financial statements.
Accounting for inventories
Two systems are offered in accounting for inventories, namely periodic system and perpetual system.
The periodic system calls for physical counting of goods on hand at the end of accounting period to
determined quantities.
On the other hand, the perpetual system requires the maintenance of records called stock cards usually
offer a running summary of inventory inflow and outflow.
Illustration – Periodic system
1. Purchased of merchandise on account, P300,000.
Purchases 300,000
Accounts payable 300,000
2. Payment of freight on the purchase, P20,000
Freight in 20,000
Cash 20,000
3. Return of merchandise purchased to supplier, P30,000
Accounts payable 30,000
Purchase return 30,000
4. Sale of merchandise on account, P400,000, at 40% gross profit.
Accounts payable 400,000
Sales 400,000
5. Return of merchandise sold from customer, P25,000.
Sales return 25,000
Accounts receivable 25,000
6. Adjustment of ending inventory, P65,000
Merchandise inventory – end 65,000
Income summary 65,000
Illustration – Perpetual system
1. Purchased of merchandise on account, P300,000.
Merchandise inventory 300,000
Accounts payable 300,000
2. Payment of freight on the purchase, P20,000
Merchandise inventory 20,000
Cash 20,000
3. Return of merchandise purchased to supplier, P30,000
Accounts payable 30,000
Merchandise inventory 30,000
4. Sale of merchandise on account, P400,000 at gross profit of 40%. The cost of merchandise sold
is 60% or P240,000
Accounts receivable 400,000
Sales 400,000
Cost of goods sold 240,000
Merchandise inventory 240,000
Under the perpetual system, the cost of merchandise sold is immediately recorded because this
is clearly determinable from the stock card.
5. Return of merchandise sold from customer, P25,000. The cost of merchandise returned is 60%
or P15,000.
Sales return 25,000
Accounts receivable 25,000
Merchandise inventory 15,000
Cost of goods sold 15,000
6. Adjustment of ending inventory
As a rule, the ending merchandise inventory is not adjusted. The balance of merchandise
inventory account represents the ending inventory.
Inventory shortage or overage
In the illustration, the merchandise inventory account has debit balance of P65,000.
For example, if the physical count shows inventory on hand P55,000, the following adjustments is
necessary:
Inventory shortage 10,000
Merchandise inventory (65,000 – 55,000) 10,000
The inventory shortage is usually closed to cost of goods sold because this is often the result of normal
shrinkage and breakage in inventory.
However, abnormal and material shortage shall be separately classified and presented as other
expense.
Trade discounts and cash discount
Trade discounts are deductions from the list of catalog price in order to arrive at the invoice price which
is the amount actually charge to the buyer.
Thus, trade discounts are not recorded.
Cash discounts are deduction from the invoice price when payment is made within the discount period.
Cash discounts are recorded as purchase discount by the buyer and sales discount by the seller.
Illustration
The list price of a merchandise purchased is P500,000 less 20% and 10%, with credit terms of 5/10 n/30.
This means that trade discounts are 20% and 10%, and the cash discount of 5% if payment is made in 10
days.
The full payment of the invoice is paid if the payment is made after 10 days and within the credit period
of 30 days.
List price 500,000
First trade discount (20% x 500,000) (100,000)
400,000
Second trade discount (10% x 400,000) ( 40,000)
Invoice price 360,000
Cash discount (5% x 360,000) ( 18,000)
Payment within the discount period 342,000
The journal entry to record the purchases is:
Purchases 360,000
Accounts payable 360,000
Note that the trade discounts are not recorded. The journal entry to record the payment within the
discount period is:
Accounts payable 360,000
Cash 342,000
Purchase discount 18,000
Methods of recording purchases
1. Gross method – purchases and accounts payable are recorded at gross.
2. Net method - purchases and accounts payable are recorded at net.
Illustration – Gross method
1. Purchases on account, P200,000, 2/10 n/30.
Purchases 200,000
Accounts payable 200,000
2. Assume payment is made within the discount period.
Accounts payable 200,000
Cash 196,000
Purchase discount 4,000
3. Assume payment is made beyond the discount period.
Accounts payable 200,000
Cash 200,000
Illustration – Net method
1. Purchases on account, P200,000, 2/10 n/30.
Purchases 196,000
Accounts payable 196,000
2. Assume payment is made within the discount period.
Accounts payable 196,000
Cash 196,000
3. Assume payment is made beyond the discount period.
Accounts payable 196,000
Purchase discount 4,000
Cash 200,000
4. Assume it is the end of accounting period, no payments is made and the discount period has
expired.
Purchase discount loss 4,000
Accounts payable 4,000
Cost of inventories
The cost of inventories shall comprise:
a. Cost of purchase
b. Cost of conversion
c. Other cost incurred
Cost of purchase
The cost of purchase of inventories comprise the purchase price, import duties and irrecoverable taxes,
freight, handling and other cost directly attributable to the acquisition of finished goods, materials and
services.
Trade discounts, rebates and other similar items are deducted in determining the cost of purchase.
Cost of conversion
The cost of conversion of inventories includes cost directly related to the units of production such as
direct labor.
It is also includes a systematic allocation of fixed and variable production overhead that is incurred in
converting materials into finished goods.
Fixed production overhead is the indirect cost of production that remains relatively constant.
Variable production overhead is the indirect cost of production that varies with the volume of
production.
Other cost
Other cost is included in the cost of inventories only to the extent that it is incurred in bringing the
inventories.
Cost of inventories of a service provider
The cost of inventories of a service provider consists of primarily of the labor and other cost of
personnel directly engaged in providing service, including supervisory personnel and attributable
overhead.
Labor and other costs relating to sales and general administrative personnel are not included but are
recognized as expense in the period which they incurred.
Cost formulas
PAS 2, paragraph 25, expressly provides that the cost of inventories shall be determined by using either:
a. First in, first out
b. Weighted average
The standard does not permit the use of last in, last out (LILO) as alternative formula in measuring
inventories.
First in, first out (FIFO)
The FIFO method assumes that “the goods first purchased are the first sold” and consequently the goods
remaining at the end of the period are those most recently purchased or produced.
Illustration – FIFO
Units Unit cost Total cost Sales (in units)
Jan Beginning 800 200 160,000
1 balance
8 Sale 500
18 Purchase 700 210 147,000
22 Sale 800
31 Purchased 500 220 110,000
The ending inventory is 700 in units.
FIFO – Periodic
Units Unit cost Total cost
From Jan. 18 Purchase 200 210 42,000
From Jan. 31 Purchase 500 220 110,000
700 152,000
Cost of goods sold
Inventory – January 1 160,000
Purchases (147,000 + 110,000) 257,000
Goods available for sale 417,000
Inventory – January 31 (152,000)
Cost of goods sold 265,000
FIFI – Perpetual
This requires the preparation of stock card.
Purchases Sales Balance
Units Unit Total cost Units Unit Total cost Units Unit cost Total cost
Date cost cost
Jan. 800 200 160,000
1
8 500 200 100,000 300 200 60,000
18 700 210 147,000 300 200 60,000
700 210 147,000
22 300 200 60,000
500 210 105,000 200 210 42,000
31 500 220 110,000 200 210 42,000
500 220 110,000
NOTA BENE
Not well that under FIFO-periodic and FIFO-perpetual, the inventory cost the same. In both cases he
January 31 inventory is P152,000.
The cost of goods sold is determined in the stock cards as follows:
January 8 sale 100,000
22 sale 165,000
Cost of goods sold 265,000
Weighted average – Periodic
The cost of inventory plus the total cost of purchases during the period is divided by the total units
purchased plus those in the beginning inventory to get the weighted average unit cost.
In other words, the weighted average cost is computed by dividing the total cost of goods available for
sale by total number of units available for sale.
The preceding illustrative data is used.
Units Unit cost Total cost
Jan. 1 Beginning balance 800 200 160,000
18 Purchases 700 210 147,000
31 Purchases 500 220 110,000
Total goods available for sale 2,000 417,000
Weighted average unit cost (417,000 / 2,000) 208.50
Inventory cost (700 x 208.50) 145,950
Cost of goods sold
Inventory – January 1 160,000
Purchases 257,000
Goods available for sale 417,000
Inventory – January 31 (145,950)
Cost of goods sold 217,050
Weighted average – Perpetual
PAS 2, paragraph 27, provides that the weighted average mat be calculated on periodic basis or as each
additional shipment is received depending upon the circumstances of the entity.
Under this method, a new weighted average cost must be computed after every purchase and purchase
return.
Thus, the total goods available after every purchase and purchase return is divided by the total units
available for sale at this time to get a new average unit cost.
This method requires the keeping of inventory stock card in order to monitor the “moving” unit cost
after every purchase.
Units Unit cost Total cost
January 1 Balance 800 200 160,000
8 Sales (500) 200 (100,000)
Balance 300 200 60,000
18 Purchase 700 210 147,000
Total 1,000 207 207,000
22 Sale ( 800 ) 207 (165,000)
Balance 200 207 41,400
31 Purchase 500 220 110,000
Total 700 216 151,400
Cost of goods sold from the stock card
January 8 Sale 100,000
22 Sale 165,600
Cost of goods sold 265,600
Another illustration
Units Unit cost Total cost
Jan 1 Beginning balance 5,000 200 1,000,000
10 Purchase 2,000 250 1,250,000
15 Sale (7,000)
16 Sales return 1,000
30 Purchase 16,000 150 2,400,000
31 Purchase return ( 2,000) 150 300,000
Ending balance 18,000
FIFO – whether periodic or perpetual
Units Unit cost Total cost
Jan. 10 Purchases 4,000 250 1,000,000
30 Purchases 14,000 150 2,100,000
18,000 3,100,000
Moving average – Perpetual
Units Unit cost Total cost
January 1 Beginning Balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
Balance 10,000 225 2,250,000
15 Sale ( 7,000) 225 (1,575,000)
Balance 3,000 225 675,000
16 Sales return 1,000 225 225,000
Balance 4,000 225 900,000
30 Purchase 16,000 150 2,400,000
Balance 20,000 165 3,300,000
31 Purchase ( 2,000 ) 150 ( 300,000)
Balance 18,000 167 3,000,000
Weighted average - Periodic
Units Unit cost Total cost
Jan. 1 Beginning balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
30 Purchases 16,000 150 2,400,000
31 Purchases ( 2,000) 150 ( 300,000)
24,000 4,350,000
Specific identification
Specific identification means that specific costs are attributed to identified items of inventory.
PAS 2, paragraph 23, provides that this method is appropriate for inventories that are segregated for a
specific project and inventories that are not ordinarily interchangeable.
The specific identification method may be used in either periodic or perpetual inventory system.
Standard costs
Standard costs are predetermined product costs establish on the basis of normal levels of materials and
supplies, labors, efficiency and capacity utilization.
Observe that a standard cost is predetermined and, once determined, is applied to all inventory
movement - inventories, goods available for sale, purchases and goods sold or placed in production.
Relative sales price method
When different commodities are purchased at a lump sum, the single cost is apportioned among the
commodities based on their respective sales price. This is based on the philosophy that cost is
proportionate to selling price.
For example, products A, B, and C are purchased at “basket price” of P3, 000, 000. Assume that the said
products ban the following sales price: A P500, 000, B P1, 500 000 and C P3, 000, 000.
Computation of cost of each product
Product A 500,000 5 / 50 x 3,000,000 300,000
Product B 1,500,000 15 / 50 x 3,000,000 900,000
Product C 3,000,000 30 / 50 x 3,000,000 1,800,000
5,000,00 3,000,000
Measurement of inventory
PAS 2, paragraph 9, provides that inventories shall be measured at the lower of cost and net realizable
value.
The measurement of inventory at the lower of cost and m realizable value is now known as LCNRV.
Net realizable value
Net realizable value or NRV is the estimated selling price in the ordinary course of business less the
estimated cost of completion and the estimated cost of disposal.
Determination of net realizable value
Inventories are usually written down to net realizable value on an item by item or individual basis.
Accounting for inventory writedown
If the cost is lower than net realizable value, there is no accounting problem because the inventory is
measured at cost and the increase in value is not recognized.
If the net realizable value is lower than cost, the inventory is measured at net realizable value and the
decrease in value is recognized.
Methods of accounting for the inventory writedown
a. Direct method or cost of goods sold method
b. Allowance method or loss method
Direct method
The inventory is recorded at the lower of cost or net realizable value.
This method is also known as “cost of goods sold method” because any loss on inventory writedown is
not accounted for separately, but “buried” m the cost of goods sold.
Allowance method
The inventory is recorded at cost and any loss on inventory writedown is accounted for separately.
This method is also known as “loss method” because a loss account “loss on inventory writedown” is
debited and a valuation account “allowance for inventory writedown” is credited.
In subsequent years, this allowance account is adjusted upward or downward depending on the
difference between the cost and ‘net realizable value of the inventory at year-end.
If the required allowance increases, an additional loss is recognized.
If the required allowance decreases, a gain on reversal of inventory writedown is recorded.
However, the gain is limited only to the extent of the allowance balance.
Illustration – Inventory data on December 31, 2019
Cost NRV LCNRV
Category 1
A 110,000 100,000 100,000
B 690,000 750,000 690,000
C 600,000 640,000 600,000
Subtotal 1,400,000 1,490,000
Category 2
D 2,0000 1,900,000 1,900,000
E 1,500,000 4,560,000 1,500,000
Subtotal 3,500,000 3,460,000
Category 3
F 1,500,000 1,460,000 1,460,000
G 1,600,000 1,690,000 1,600,000
Subtotal 3,100,000 3,150,000 __________
Grand total 8,000,000 8,100,000 7,850,000
LCNRV item by item or individual 7,850,000
Cost NRV LCNRV
Category 1 1,400,000 1,490,000 1,400,000
Category 2 3,500,000 3,460,000 3,460,000
Category 3 3,100,000 3,150,000 3,100,000
LCNRV by category 7,690,000
Cost NRV LCNRV
LCNRV by total 8,000,000 8,100,000 8,000,000
The inventory is measured at the lower of cost and net realizable applied on an item by item or
individual basis.
Cost – December 31, 2019 8,000,000
Net realizable value 7,850,000
Inventory writedown 150,000
Direct method
The inventory is recorded at the lower of cost or NRV,
Inventory - December 31, 2019 7,850,000
Income summary 7,850,000
The loss on inventory writedown of P150, 000 is not accounted for separately.
The entry will have the effect of increasing cost of goods sold because the NRV is lower than cost.
Allowance method
The inventory on December 31, 2019 is recorded at cost.
Inventory December 31, 2019 8,000,000
Income summary 8,000,000
The loss on inventory writedown is accounted for separately.
Loss on inventory writedown 150,000
Allowance for inventory writedown 150,000
The loss on inventory writedown is included in-the computation of cost of goods sold.
The allowance for inventory writedown is presented as a deduction from the inventory.
Inventory 4 December 31, 2019, at cost 8,000,000
Allowance for inventory writedown ( 150,000)
Net realizable value 7,850,000
Continuing illustration
Assume on December 81, 2020, the total cost of the inventory is P8,500,000 and the net realizable value
is P8,400,000.
Direct method
Again, under this method, the inventory is simply recorded at the lower amount.
Thus, the journal entry to record the inventory on December 91, 2020 is;
Inventory December 31, 2020 8,400,000
Income summary 8,400,000
Allowance method
Cost December 31, 2020 8,500,000
Net realizable value 8,400,000
Required allowance -December 31, 2020 100,000
Less: Allowance balance December 31, 2019 150,000
Decrease in allowance (50,000)
The decrease in allowance is a reversal of the previous inventory writedown and recorded as gain on
reversal of writedown.
Allowance for inventory writedown 50,000
Gain on reversal of inventory writedown 50,000
The gain on reversal of inventory writedown is presented as a deduction from cost of goods sold.
PAS 2, paragraph 34, provides that the amount of any reversal of any writedown of inventory arising
from an increase in net realizable value shall be recognized as a reduction m the amount of inventory
recognized as an expense in the period m which the reversal occurs.
The amount of inventory recognized as an expense of the period is actually the cost of goods sold during
the period.
Another illustration
Inventory – January 1
Cost 5,000,000
Net realizable value 4,500,000
Net purchases 20,000,000
Inventory – December 31
Cost 6,000,000
Net realizable value 5,300,000
Direct method
Inventory – January 1 4,500,000
Net purchases 20,000,000
Goods available for sale 24,500,000
Inventory – December 31 ( 5,300,000)
Cost of goods sold 19,200,000
Note that under direct method, the inventory, whether beginning or ending, is presented at the lower
amount.
Allowance method
Inventory – January 1 5,000,000
Net purchases 20,000,000
Goods available for sale 25,000,000
Inventory – December 31 ( 6,000,000)
Cost of goods sold before inventory writedown 19,000,000
Loss on inventory writedown for current year 200,000
Cost of goods sold after inventory writedown 19,200,000
Required allowance – December 31 (6,000,000 – 5,300,000) 700,000
Required allowance – January 1 500,000
Increase in allowance – loss on writedown 200,000
Note that whether direct or allowance method, the cost of goods sold must be the same.
MULTIPLE CHOICE PROBLEMS
Problem 1
Anan Company provided the following data:
Items counted in the bodega 4,000,000
Items included in the count specifically segregated per sale contract 100,000
ltems in receiving department, returned by customer, in good condition 50,000
Items ordered and in the receiving department 400,000
Items ordered, invoice received but goods not received.
Freight is on account of seller. 300,000
Items shipped today, invoice mailed, FOB shipping point 250,000
Items shipped today, invoice mailed, FOB destination 150,000
Items currently being used for window display 200,000
Items on counter for sale 800,000
Items in receiving department, refused because of damage 180,000
Items included in count, damaged and unsalable 50,000
Items in the shipping department 250,000
What is the correct amount of inventory?
a. 5,700,000 b. 6,000,000 C. 5,800,000 d. 5,150,000
Solution : Answer a
Items counted in the bodega 4,000,000
Items included in count specifically segregated (100,000)
Items returned by customer Items ordered and in receiving department 50,000
Items shipped today, FOB destination 400,000
Items for display 150,000
Items on counter for sale 200,000
Damaged and unsalable 800,000
items included in count (50,000)
Items in the shipping department 250,000
5,700,000
Problem 2
Hero Company reported inventory on December 31, 2018 at P6,000,000 based on a physical count of
goods priced at cost and before any necessary year-end adjustments relating to the following:
• Included in the physical count were goods billed to a customer
FOB shipping point on December 30, 2018. These goods had
a cost of P125,000 and were picked up by the carrier on January
7, 2019
• Goods shipped FOB shipping point on December 28, 2018,
from a vendor to Hero were received and recorded on January
4, 2019. The invoice cost was P300,000.
What amount should be reported as inventory on December 31, 2018?
a. 5,875,000 b. 6,000,000 c. 6,175,000 d. 6,300,000
Solution Answer d
Physical count 6,000,000
Goods shipped FOB shipping point on December 30, 2018
to Hero and received January 4, 2019 300,000
Inventory, December 31, 2018 6,300,000
The goods costing P125,000 are properly included in the December 31,2018 physical count because the
goods are shipped FOB shipping point only on January 7,2019 (picked up by common carrier).
Problem 3
On August 1, Stella Company recorded purchases of inventory of P800,000 and P1,000,000 under credit
terms of 2/15, net 30.
The payment due on the P800,000 purchase was remitted on August 16. The payment due on the
P1,000,000 purchase was remitted on August 31.
Under the net method and the gross method, these purchases should be included at what respective
amounts in the determination of cost of goods available for sale?
Net Method Gross method
a. 1,784,000 1,764,000
b. 1764,000 1 800,000
d. 1,764,000 1,784,000
c. 1,800,000. 1,764,000
Solution : Answer c
Net method
Purchases (800,000 + 1,000,000) 1,800,000
Purchase discount taken (2%x 800,000) (16,000)
Purchase discount not taken (2% x 1,000,000) (20,000)
Net amount 1,764,000
Under the net method, the purchase discount is deducted from purchases regardless of whether taken
or not taken.
Gross method
Purchases 1,800,000
Purchase discount taken (16,000)
Net purchases 1,784,000
Under the gross method, the purchases are recorded at gross and only the purchase discount taken is
deducted from purchases in determining Cost of goods available for sale.
Problem 4
Marsh Company had 150,000 units of product A on hand at January 1, costing P21 each.
Purchases of product A during the month of January were:
Units Unit cost
January 10 200,000 22
18 250,000 23
28 100,000 24
A physical count on January 31 shows 250,000 units of product A on hand.
What is the cost of the inventory on January 31 under the FIFO method?
a. 5,850,000
b. 5,550,000
C. 5,350,000
d. 5,250,000
Solution Answer -A
Units Unit Cost Total cost
January 18 150,000 23 3,450,000
28 100,000 24 2,400,000
Total FIFO cost 250,000 5,850,000
Problem 5
Jayson Company used the perpetual system.
The following information has been extracted from the records about one product:
Units Unit Cost Total cost
Jan. 1 Beginning balance 8,000 70.00 560,000
6 Purchase 3,000 70.50 211,500
Feb. 5 Sale 10,000
Mar. 5 Purchase 11,000 73.50 808,500
Mar. 8 Purchase return 800 73.50 58,800
Apr. 10 Sale 7,000
Apr. 30 Sale return 300
If the FIFO cost flow method is used, what is the cost of the inventory on April 30?
a. 330,750 b. 315,000 c. 433,876 d. 329,360
Solution Answer A
From March 5 purchase (4,500 units x 73.50) 330,750
Whether periodic or perpetual system, the FIFO inventory is the same.
PROBLEM 6
Winter Company provided the following inventory data at year-end:
Cost NRV
Skis 2,200,000 2,500,000
Boots 1,700,000 1,500,000
Ski equipment 700,000 800,000
Ski apparel 400,000 500,000
What amount should be reported as inventory at year-end?
a 5,000,000 b. 5,300,000 c. 4,800,000 d. 5,200,000
Solution Answer b
Historical cost 1,200,000
Net realizable value (1,300,000-150,000) 1,150,000
LCNRV 1,150,000
Problem 7
Greece Company provided the following data for the current year
Inventory- January 1:
Cost 3,000,000
Net realizable value 2,800,000
Net purchases 8,000,000
Inventory December 31:
Cost 4,000,000
Net realizable value 3,700,000
What amount should be reported as cost of goods sold?
a. 7,000,000 b.7,100,000 c. 7,300,000 d.7,200,000
Solution Answer b
Inventory --January 1, at cost 3,000,000
Net purchases 8,000,000
Goods available for sale 11,000,000
Inventory - December 31, at cost (4,000,000)
Cost of goods sold before inventory writedown 7,000,000
Loss on inventory writedown 100,000
Cost of goods sold after inventory writedown 7,100,000
Required allowance December 31
4,000,000-3,700,000) 300,000
Allowance for inventory writedown - January 1
(3,000,000-2,800,000) Loss on inventory writedown 200,000
100,000
The amount of any inventory writedown to net realizable value and al losses on inventory shall be
included in cost of goods sold.
The amount of any reversal of inventory writedown shall be deducted from cost of goods sold.