Intermediate Accounting 1

Module 8
INVENTORIES (PAS 2)

Objectives
After this module, readers are expected to gain familiarization and demonstrate mastery of the following:
1. Scope of Philippine Accounting Standard (PAS) 2 – Inventories
2. Definition and Measurement of Inventories
3. Recognition of Expense
4. Disclosure requirements of PAS 2

Relevant Standards
Main Standard
PAS 2 Inventories
Related Standards
PAS 41 Agriculture
PAS 16 Property, Plant and Equipment
PAS 40 Investment Property
PAS 10 Events after the reporting period
PAS 37 Provisions, Contingent Liabilities and Contingent Assets
PFRS 15 Revenue from Contract with Customers

Applicability of PAS 2 (PAS 2 par. 2-5)

PAS 2 applies to all inventories, EXCEPT (1 and 2):

1. financial instruments (see PAS 32 Financial Instruments: Presentation and PFRS 9 Financial Instruments);
and
2. biological assets related to agricultural activity and agricultural produce at the point of harvest (see
PAS 41 Agriculture).

Item Standard
1. Financial Instruments (e.g. a portfolio of held- PAS 32, PAS 39 (before January 1, 2018), and PFRS 9
for-trading financial assets or available-for-sale (on or after January 1, 2018)
financial assets)
2. Biological assets related to agricultural activity PAS 41
(except for bearer plants) and agricultural
produce at the point of harvest
3. Biological assets not related to agricultural PAS 16
activity and meets the definition of PPE (e.g.
guard dogs, landscape and other
improvements, etc.)
4. Bearer plants even though its related to PAS 16
agricultural activity
5. Costs incurred to fulfil a contract that do not PFRS 15
give rise to inventories

Financial Instruments and Biological Assets are not Inventories and therefore PAS 2 does not apply for these items.
Obviously, other assets that are within the scope of another Standard are not Inventories.

Sales with buyback/repurchase agreement (or product financing agreement) do not transfer control to the customer
(PFRS 15).

Items of inventories where the measurement principles of PAS 2 does not apply:
1. Inventories held by:
A. Producers of:

Agricultural and forest products, agricultural produce after harvest, and mineral and mineral
products to the extent that they are measured at net realizable value in accordance with well-
established practices in those industries.

When such inventories are measured at net realizable value, changes in that value are recognized in
profit or loss in the period of the change.

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The inventories are measured at net realizable value at certain stages of production.

B. Commodity broker-traders who measure their inventories at fair value less costs to sell.

When such inventories are measured at fair value less costs to sell, changes in fair value less costs to
sell are recognized in profit or loss in the period of the change.

Definition: Broker-traders are those who buy or sell commodities for others or on their own account.

Items from A and B above are classified as Inventories under PAS 2 but EXCLUDED FROM ONLY THE
MEASUREMENT REQUIREMENTS of PAS 2.

Inventory excluded from only the Example cases

measurement requirements of PAS
2
A. Producers of agricultural and 1. When agricultural crops have been harvested or minerals have
forest products, agricultural been extracted AND sale is assured under a forward contract or
produce after harvest, and a government guarantee; OR
mineral and mineral 2. When an active market exists AND there is a negligible risk of
products failure to sell.

These inventories are excluded from only the measurement

requirements of PAS 2.
B. Commodity broker-traders 1. The inventories are principally acquired with the purpose of
selling in the near future and generating a profit from fluctuations
in price or broker-traders’ margin.

When these inventories are measured at fair value less costs to

sell, they are excluded from only the measurement requirements
of PAS 2.

Key Terms and Definitions

Ø Inventories are assets:

(a) Held for sale in the ordinary course of business;

(b) In the process of production for such sale; or

(c) In the form of materials or supplies to be consumed in the production process or in the rendering of
services.

Inventories Example
A. Assets held for sale in the 1. Goods purchased and held for resale including, for
ordinary course of business example,
a. Merchandise purchased by a retailer and held for
resale, or
b. Land and other property held for resale.
2. Finished goods produced by the entity.
B. Assets in the process of 1. Work in progress being produced by the entity.
production for such sale
C. Assets in form of materials or 1. Materials and supplies awaiting use in the production
supplies to be consumed in the process including, for example,
production process or in the a. Raw materials, or
rendering of services b. Factory supplies (e.g. unused gasoline and oil for
testing finished goods, factory machine lubricants).

Ø Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.

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Ø Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable,
willing parties in an arm’s length transaction.

Cost of Inventories

Costs of purchase - The costs of purchase of inventories comprise the purchase price, import duties and other non-
recoverable taxes and transport, handling and other costs directly attributable to the acquisition of finished
goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining
the costs of purchase.

2 Methods of accounting for purchases (Gross method vs. Net method)

Gross Method Net Method
Purchases At invoice price Purchases is recorded at net
amount (whether discount is
taken or not)
Net cost of Invoice price plus freight-in minus
inventory/purchases if purchase return minus cash
Invoice price plus freight-in
purchase discount is taken discount taken IF payment of the
minus purchase return minus
full invoice amount is made within
cash discount (whether
the discount period
discount is taken or not)
“Purchase discount” is recorded as
Purchases is already recorded
part of cost of sales.
at net amount.
Net cost of Invoice price plus freight-in minus
inventory/purchases if purchase return
purchase discount is not
taken
Purchase discount Recorded only when taken Not applicable
Purchase discount lost Not applicable Recorded only when discount is
not taken. Purchase discount
lost is recorded as part of either
financing costs or other
expenses.

Costs of conversion
• Direct labor
• Variable production overhead is allocated to each unit using the actual use of production facilities.
• Fix production overhead allocated using the normal operating capacity of production facilities.

Production Overheads Allocation Bases for the Overhead Costs to the Cost of
Conversion
Fixed Production Ordinarily, the allocation is based on the normal capacity of the
Overheads production facilities.

The actual level of production may be used if it approximates normal

capacity.

Note: The amount of fixed overhead allocated to each unit of

production is not increased as a consequence of low production or idle
plant. However, In periods of abnormally high production, the amount of
fixed overhead allocated to each unit of production is decreased so that
inventories are not measured above cost.
Variable Production Ordinarily, allocated to each unit of production on the basis of the
Overheads actual use of the production facilities.

Unallocated production overheads are recognized as an expense in the period in which they are
incurred.

A production process may result in more than one product being produced simultaneously, for example,
i. When joint products are produced, or
ii. When there is a main product and a by-product.

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Cases Allocation Bases for the Costs of Conversion

between Joint Products
A. Cost of conversion of each NO ALLOCATION. Cost of conversion of a product is
product ARE SEPARATELY based on its separately identified costs for that individual
IDENTIFIABLE product.
B. Cost of conversion of each Allocated between the products on a rational and
product are NOT consistent basis, for example,
SEPARATELY IDENTIFIABLE a. Relative Sales Value of each product, either:
i. At the stage in the production process
when the product becomes separately
identifiable, or
ii. At the completion of production

C. With By-product Most by-products, by their nature, are IMMATERIAL.

a. When this is the case, by-products are often
measured at net realizable value AND
b. this value is deducted from the cost of the main
product.
As a result, the carrying amount of the main product is
not materially different from its cost.

Other costs incurred in bringing the inventories to their present location and condition. Other costs are included in the
cost of inventories only to the extent that they are incurred in bringing the inventories to their present location
and condition. For example, it may be appropriate to include non-production overheads or the costs of
designing products for specific customers in the cost of inventories.

A. Costs of Inventories Example

a. Costs of 1. Purchase price +
Purchase ADDITIONS
2. Import duties and other taxes (other than those subsequently
recoverable by the entity from the taxing authorities), +
3. Transport costs (i.e. freight-in or freight paid by consignor to
move the inventory for consignment to consignee), +
4. Handling costs, and +
5. Other costs directly attributable to the acquisition of
finished goods, materials and services. +
DEDUCTIONS
6. Trade discounts, rebates and other similar items are
deducted in determining the costs of purchase. -
b. Costs of 1. Costs directly related to the units of production, such as direct
Conversion labor, and
2. Systematic allocation of fixed and variable production
overheads that are incurred in converting materials into
finished goods.

Conversion Costs = Direct Labor Costs +

Applied Overhead Costs
c. Other costs 3. It may be appropriate to include non-production overheads
or the costs of designing products for specific customers
in the cost of inventories.

Inventory cost should exclude:

a) Abnormal waste
b) Storage costs
c) Administrative overheads unrelated to production
d) Selling costs
e) Foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign
currency

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f) Interest cost when inventories are purchased with deferred settlement terms. Inventories purchased are
normally ready for resale/consumption (e.g. merchandise inventory, raw materials, supplies etc.), are NOT
qualifying assets.

Techniques for the measurement of cost (PAS 2 par. 21-22)

Is standard cost YES, standard cost may be used for convenience IF the result approximates cost.
allowed as a
technique for the Standard costs take into account normal levels of materials and supplies, labor, efficiency
measurement of the and capacity utilization.
cost of inventory?
They are regularly reviewed and, if necessary, revised in the light of current conditions.
Is retail method YES, retail method may be used for convenience IF the result approximates cost.
allowed as a
technique for the The retail method is often used in the retail industry for measuring inventories of large
measurement of the numbers of rapidly changing items with similar margins for which it is impracticable to
cost of inventory? use other costing methods.

The cost of the inventory is determined by reducing the sales value of the inventory by
the appropriate percentage gross margin.
The percentage used takes into consideration inventory that has been marked down to
below its original selling price.

An average percentage for each retail department is often used.

Inventory Estimation Techniques

Ø Gross Method – Based on the assumption that the gross profit applied by an entity to its products remains
approximately the same from period to period and therefore the relationship between cost of goods sold and
sales is constant.

Goods available for sale X

Less: Estimated cost of goods sold
Net sales* X
Less: Gross profit X X
Estimated ending inventory X

The cost of goods sold can also be computed if the net sale is multiplied by 1 less the GP rate if the gross profit
rate based on sales or net sales divided by 1 plus the gross profit rate if the gross profit rate is based on cost.

*Net sales shall be gross sales less “sales returns and allowance” or “sales returns” only in order for the estimate
in ending inventory not to be overstated.

Ø Retail Method – Employed by retailers dealing with numerous different items for sale with varying mark up
percentages to keep track unit cost.

Goods available for sale at retail X

Less: Net sales X
Employee discounts X
Normal losses X X
Estimated ending inventory X
Multiplied by the cost ratio %
Estimated ending inventory at cost X

Ø Conservative Cost Ratio = GAS at cost divided by GAS at retail before net markdown

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Ø Average Cost Ratio = GAS at cost divided by GAS at retail (after net markdown)
Ø FIFO Cost Ratio = Purchases at cost divided by Purchases at retail after net markdown
Ø Net sales similar to the “gross profit method” of estimation is computed by ignoring the sales discount and
sales allowance if it is separated from sales returns.

Summary of the Basic Formula of Retail Method

Goods available for sale @ retail PXXX
Less: Net sales
Sales PXXX
Less: Sales return ONLY XX XXX
Ending inventory @ retail PXXX
Multiply: Cost ratio %
Ending inventory @ cost PXX

Summary of the Computation of Cost Ratio under the three methods

Conservative/ Average FIFO method
Conventional/ Lower of method
Cost or Market (LCM)
Formula GAS @ cost GAS @ cost GAS @ cost (excluding Beg. Inv @cost)
GAS @ retail (excluding GAS @ retail GAS @ retail (excluding Beg. Inv. @retail)
net markdowns)
Treatment of
Excluded Included Included
net markdown*
Treatment of
Included Included Included
net markup**
Treatment of
beginning Included Included Excluded
inventory

*Net markup = Initial markup plus additional markup minus markup cancellation
**Net markdown = Markdown minus markdown cancellation

Summary
Purchases @ cost / GAS Purchases @ retail / GAS Sales
@ cost @ retail
Purchase discounts Deducted Disregarded -
Purchase allowances Deducted Disregarded -
Freight-in Added Disregarded -
Purchase returns Deducted Deducted -
Normal shrinkage, spoilage and
Disregarded Deducted -
breakage
Abnormal shortage, shrinkage,
Deducted Deducted -
spoilage and breakage
Departmental transfer in or debit Added Added -
Departmental transfer out or
Deducted Deducted -
credit
Sales return - - Deducted
Sales discount - - Disregarded
Sales allowances - - Disregarded
Employee discount - - Added

Cost formulas/ Cost flow (PAS 2 par. 23-27)

Ø The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and
segregated for specific projects shall be assigned by using specific identification of their individual costs.

Ø The cost of inventories, other than those that are not ordinarily interchangeable, shall be assigned by using the
first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula for all
inventories having a similar nature and use to the entity. For inventories with a different nature or use, different
cost formulas may be justified.

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Example scenarios May use different cost formulas (FIFO and

Weighted Average)
1. Inventories used in one operating segment Justifiable
may have a USE to the entity different from
the same type of inventories used in another
operating segment.
2. Difference in geographical location of Not sufficient to justify the use of different cost
inventories, by itself formulas.
3. Difference in the respective tax rules Not sufficient to justify the use of different cost
affecting the inventory, by itself formulas.
Note: For items 2 and 3 above, there is actually NO difference in inventory nature or usage.

T-accounts
Accounts Payable Purchases
DR CR DR CR
Payments Purchases on account Purchases on account Closing entry to COS/
Income Summary
Purchase returns and Freight-in (e.g. FOB Purchases for cash
allowances shipping point freight
prepaid)
Purchase discounts

Manufacturing Cost Flows

1. Direct materials used

Raw materials inventory, beginning (A) PXXX

Add: Net Purchases (B=C+D-F-G)
Purchases (C) PXX
Add: Freight-in (D) XX
Gross purchases (E = C+D) PXX
Less: Purchase returns and allowances (F) PXX
Purchase discounts (G) XX PXX PXXX
Raw materials available for use (H=A+B) PXXX
Less: Raw materials inventory, ending (I) XXX
Direct materials used (J=H-I) PXXX

2. Total manufacturing costs

Direct materials used (A) PXXX

Add: Conversion costs (B=C+D)
Direct labor (C) PXX
Applied manufacturing overhead (D) XX PXXX
Total manufacturing costs (E=A+B) PXXX

3. Cost of goods manufactured

Work-in-process inventory, beginning (A) PXX

Add: Total manufacturing costs (B) XXX
Total cost of goods placed into process (C=A+B) PXXX
Less: Work-in-process inventory, ending (D) XX
Cost of goods manufactured (E=C-D) PXXX

4. Cost of goods sold

Finished goods, beginning (A) PXX

Add: Cost of goods manufactured (B) XXX
Cost of goods available for sale (C=A+B) PXXX
Less: Finished goods, ending (D) XX
Cost of Goods Sold (E=C-D) PXXX

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FIFO Perpetual and Periodic Illustrated

Units Unit Cost Total Cost

Jan. 1 Beginning balance 8,000 70.00 560,000
6 Purchase 3,000 81.00 243,000
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

Ø If periodic FIFO is used, the ending inventory will be unit cost from the March 8 purchase and will be
deducted from the accumulation of the beginning inventory and net purchase, known as the total goods
available for sale.
Beginning balance (8,000 x 70) 560,000
Feb. 5 Purchase (3,000 x 81) 243,000
Mar. 5 Net Purchase (10,200 x 73.50) 749,700
Total goods available for sale 1,552,700
Less: Ending Inventory* (4,500 x 73.50) 330,750
Cost of goods sold 1,221,950

*Ending inventory in units (21,200 – 16,700) 4,500

Ø COGS computation under perpetual

Feb. 5 Costs of goods sold:

Jan. 1 Inventory (8,000 x 70) 560,000

Jan. 6 Inventory (2,000 x 81) 162,000
Total 722,000

April 10 Net Costs of goods sold:

Jan.6 Inventory (1,000 x 81) 81,000

Mar. 5 Inventory (5,700 x 73.50) 418,950
Total 499,950

Jan. 1 Inventory 560,000

6 Purchase 243,000
Total 803,000
Feb. 5 COGS (722,000)
Balance 81,000
Mar. 5 Net Purchase 749,700
Total 830,700
Apr. 10 Net COGS (499,950)
Apr. 30 Inventory balance 330,750

Ø Periodic Average or Weighted Average

Beginning balance (8,000 x 70) 560,000
Feb. 5 Purchase (3,000 x 81) 243,000

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Mar. 5 Net Purchase (10,200 x 73.50) 749,700

Total goods available for sale 1,552,700
Less: Ending Inventory* (4,500 x 73.24**) 329,580
Cost of goods sold 1,223,120

Total cost 1,552,700

Divide by total number of units 21,200
**Weighted average cost per unit 73.24

Ø Perpetual Average or Moving Average

Jan. 1 Inventory 560,000
6 Purchase 243,000
Total 803,000
Feb. 5 COGS (10,000 x 73.00***) (730,000)
Balance 73,000
Mar. 5 Net Purchase 749,700
Total 822,700
Apr. 10 Net COGS (6,700 * 73.46****) (492,182)
Apr. 30 Inventory balance 330,518

*** Feb 5. Average cost (803,000 / 11,000) 73.00

**** April 10 Average cost (822,700 / 11,200) 73.46

Measurement of Inventories

Ø Inventories are required to be stated at the lower of cost and net realizable value (NRV). Inventories are
usually written down to net realizable value item by item. In some circumstances, however, it may be
appropriate to group similar or related items.

Cost of agricultural produce harvested from biological assets

Inventories comprising agricultural produce that an entity has harvested from its biological assets.
On initial recognition Apply measurement requirements of PAS 41 (Fair value less cost to sell at the
point of harvest), and PAS 2 thereafter.
Cost of inventory Under PAS 41 - FAIR VALUE LESS COST TO SELL at the point of harvest. This is
the cost of the inventories at the date for application of PAS 2.

Practice of writing inventories down below Cases:

cost to net realizable value (When NRV < The cost of inventories may not be recoverable if those
Cost) inventories’:
a. are damaged,
*consistent with the view that assets should b. become wholly or partially obsolete,
not be carried in excess of amounts c. selling prices have declined,
expected to be realized from their sale or d. estimated costs of completion or the estimated costs to
use. be incurred to make the sale have increased.
(Thus, NRV may be < Cost)

Writing inventories down below cost to net realizable value

Analysis Item by item (e.g. lumber – grade A, lumber – grade B, etc.)

In some circumstances, however, it may be appropriate to group similar or related items (e.g.
product line A, product line B, etc.). This may be the case with items of inventory
a. relating to the same product line
i. that have similar purposes or end uses,
ii. are produced and marketed in the same geographical area, and
iii. cannot be practicably evaluated separately from other items in that product
line.

Not by classification (e.g. raw materials inventory, work-in-progress inventory, finished goods,
factory supplies, etc.)

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It is not appropriate to write inventories down on the basis of

a. a classification of inventory, for example, finished goods, or
b. all the inventories in a particular operating segment.
Estimation of a. Based on the most reliable evidence available at the time the estimates are
NRV made, of the amount the inventories are expected to realize.
b. These estimates take into consideration fluctuations of price or cost directly relating to
events occurring after the end of the period to the extent that such events confirm
conditions existing at the end of the period (Adjusting events). (See PAS 10
Events After the Reporting Period)
c. Estimates of net realizable value also take into consideration the purpose for which
the inventory is held. For example,
I. For example, the net realizable value of the quantity of inventory held to
satisfy firm sales or service contracts is based on the contract price.
i. Situation 1 – Write-down of inventory (Order < Produced): If the
sales contracts are for less than the inventory quantities held, the
net realizable value of the excess inventory is based on
general selling prices (e.g. excess “2018” graduation sash Size
XXL, excess 2018 flyers relevant only for 2018, Made-to-order
Intrams T-shirt etc.).
ii. Situation 2 – Set up of Estimated Liability (Order > Produced):
Provisions may arise from firm sales contracts in excess of
inventory quantities held or from firm purchase contracts.
Such provisions are dealt with under PAS 37 Provisions,
Contingent Liabilities and Contingent Assets.
Exemption Materials and other supplies held for use in the production of inventories.
I. They are not written down below cost IF the finished products in which they will be
incorporated are expected to be sold at or above cost.

Normally, finished goods are sold above cost. Thus, raw materials and other
supplies are not written down below cost.

However, when a decline in the price of materials indicates that the cost of the
finished products exceeds net realizable value, the materials are written down to
net realizable value.
i. Measurement of NRV of raw materials and supplies: In such circumstances,
the replacement cost of the materials may be the best available
measure of their net realizable value.
Recurrence of A new assessment is made of net realizable value in each subsequent period.
assessment
Reversal The amount of the write-down is reversed so that the new carrying amount is the lower of
the cost and the revised net realizable value.

This occurs, for example, when an item of inventory that is carried at net realizable value,
because its selling price has declined, is still on hand in a subsequent period and its selling
price has increased.
Limit on reversal The reversal is limited to the amount of the original write-down.

Recognition a. The amount of any write-down of inventories to net realizable value and all losses of
inventories shall be recognized as an expense in the period the write-down or
loss occurs (i.e. added to COS).
b. The amount of any reversal of any write-down of inventories, arising from an increase
in net realizable value, shall be recognized as a reduction in the amount of
inventories recognized as an expense in the period in which the reversal
occurs (i.e. deducted from COS).
NRV vs. FV a. NRV refers to the net amount that an entity expects to realize from the sale of
inventory in the ordinary course of business. While, FV reflects the price at which
an orderly transaction to sell the same inventory in the principal (or most
advantageous) market for that inventory would take place between market
participants at the measurement date.
b. NRV is an entity-specific value, while FV is a market-base measurement.

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c. NRV for inventories may not equal FV less cost to sell.

Methods of Direct Method Allowance Method

Accounting Beginning inventory (@ LCNRV) Beginning inventory (@ Cost)
(Direct Method Add: Net cost of purchases Add: Net cost of purchases
vs. Allowance Cost of goods available for sale Cost of goods available for sale
Method) Ending inventory (@ LCNRV) Ending inventory (@ Cost)
COS after inventory write-down COS before inventory write-down
Add: Loss on inventory write-down
Less: Gain on reversal of inventory write-
down
COS after inventory write-down

EXAMPLE:
Cost NRV LCNRV
Product A 200,000 180,000 180,000
Product B 300,000 250,000 250,000
Product C 100,000 130,000 100,000
Total 600,000 560,000 530,000
Ø The total carrying amount of inventories shall be 530,000, which is the most conservative amount by applying
the LCNRV approach.

Write-Down to Net Realizable Value

Ø If the ending inventory is recorded outright at 530,000, the writedown shall be immediately recognized in cost of
goods sold. This is the direct or cost of sales method.
Ø If the ending inventory is recorded first at the cost of 600,000, a loss of 70,000 with a corresponding credit to an
allowance account shall be recognized. This is the loss/allowance method.
Ø Any write-down to NRV should be recognized as an expense in the period in which the write-down occurs.
Ø Any reversal should be recognized in the income statement in the period in which the reversal occurs.

Recognition as an Expense

Ø When inventories are sold, the carrying amount of those inventories shall be recognized as an expense in the
period in which the related revenue is recognized.
Ø The amount of any write-down of inventories to net realizable value and all losses of inventories shall be
recognized as an expense in the period the write-down or loss occurs.
Ø The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value,
shall be recognized as a reduction in the amount of inventories recognized as an expense in the period in which
the reversal occurs.
Ø Some inventories may be allocated to other asset accounts, for example, inventory used as a component of
self-constructed property, plant or equipment. Inventories allocated to another asset in this way are recognized
as an expense during the useful life of that asset.

Analysis of expenses
Function of expense format/method Nature of expense format/method
Cost of Sales, which consists of The entity discloses the costs recognized as an
a. those costs previously included in the expense
measurement of inventory that has now a. for raw materials and consumables,
been sold and b. labor costs and other costs
b. unallocated production overheads and c. together with the amount of the net
c. abnormal amounts of production costs of change in inventories for the period; and
inventories. d. loss on inventory write-down and gain on

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d. loss on inventory write-down and gain on reversal of inventory write-down

reversal of inventory write-down

Required disclosures:

a) Accounting policy for inventories.

b) Carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished
goods. The classifications depend on what is appropriate for the enterprise.
c) Carrying amount of any inventories carried at fair value less costs to sell.
d) Amount of any write-down of inventories recognized as an expense in the period.
e) Amount of any reversal of a writedown to NRV and the circumstances that led to such reversal.
f) Carrying amount of inventories pledged as security for liabilities.
g) Cost of inventories recognized as expense (cost of goods sold).

Change in Inventory Method

Transition Treatment
From FIFO/Weighted Average to Last-in, First-Out Not allowed. The standard prohibits the use of LIFO
(LIFO) method
From LIFO to FIFO/Weighted Average Retrospective restatement of a correction of prior
period error (see PAS 8 Accounting Policies, Changes
in Accounting Estimates and Errors)
From FIFO to Weighted Average or vice versa Retrospective application of a change in
accounting policy (see PAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors)

Sources:
1. Philippine Accounting Standard (PAS) 2 – Inventories
2. Philippine Accounting Standard (PAS) 41 – Agriculture
3. Valix, Peralta and Valix, 2019, Conceptual Framework and Accounting Standards

Question:
1. Define inventories.
2. What are the components of cost of inventories?
3. Explain cost of purchase, cost of conversion and other cost included in cost of inventories.
4. Identify certain costs that are excluded from the cost of inventories.
5. Explain the cost of inventories of a service provider.
6. Explain the cost formulas in determining cost of inventories
7. Explain the specific identification of determining cost of inventories.
8. What is the standard in measuring inventory in the statement of financial position?
9. Explain net realizable value.
10. Explain the accounting for inventory write-down.

TRUE OR FALSE
1. In a period of rising prices, the use of FIFO relates the current high costs of acquiring goods with rising sales
prices. As a result, FIFO tends to have a stabilizing effect on gross profit margins.
2. The gross method of accounting for purchase discounts is theoretically preferable to the net method.
3. The gross method of accounting for purchase discounts reflects the fact that discounts not taken are in effect
credit-related expenditures incurred for failure to pay within the discount period.
4. The specific identification method is a highly objective approach to matching historical costs with revenues.
5. The specific identification, as an inventory method, matches the flow of recorded costs to the physical flow of
goods.
6. With FIFO, inventories are reported on the balance sheet at or near their current value.
7. Unlike other inventory cost methods, the average cost approach provides the same unit cost for items of equal
utility.
8. FIFO provides income tax savings during periods of falling prices.
9. Inventories are measured at net realizable value (NRV).
10. Inventory write-downs and reversals of write-downs are always recognized in profit or loss.

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