INVENTORIES
GENERAL RULE: The one who has POSSESSION has LEGAL TITLE
EXCEPTIONS:
1. GOODS IN TRANSIT:
SHIPPING TERMS: Point of transfer of ownership
a) FOB SHIPPING POINT Shipping point
b) FOB DESTINATION Buyer’s location
c) FREE ALONGSIDE Upon delivering the goods up to the dock next to or
alongside the vessel on which the goods are to be
shipped
d) Cost, insurance, freight (CIF) Upon loading of the goods to the vessel
e) Ex-ship When the goods are unloaded at the other side
WHO IS THE OWNER?
2. CONSIGNMENT
NOTE:
a) INVENTORIABLE COST: CONSIGNOR
Freight cost and other handling costs of goods out
on consignment
b) NON-INVENTORIABLE COST
Freight cost if the consigned goods are returned to
the consignor
Original freight cost returned consigned goods
Storage cost and other reimbursable costs charged
to consignor
3. INVENTORY FINANCING AGREEMENTS
SALE WITH A REPURCHASE AGREEMENT SELLER
PLEDGE OF INVENTORIES PLEDGOR/BORROWER
LOAN OF INVENTORIES BORROWER
4. SALE OR RETURN BUYER
If unsalable or the buyer has the intention of
returning it, the goods are NOT recognized by the
buyer.
5. SALE ON TRIAL OR APPROVAL SELLER
6. INSTALLMENT SALE BUYER
7. BILL AND HOLD SALE BUYER
8. LAY-AWAY SALE SELLER
9. SPECIAL ORDER BUYER UPON COMPLETION
Initial measurement: COST.
COST OF PURCHASES:
1. PURCHASE PRICE:
Regular purchase Invoice price
Deferred settlement Cash price equivalent
Lump-sum purchase Allocated purchase price using RELATIVE FAIR
VALUE
2. IMPORT DUTIES
3. IRRECOVERABLE TAXES
VAT, being recoverable is NOT CAPITALIZED unless
the entity is NON-VAT registered, the VAT becomes
capitalized.
4. FREIGHT AND HANDLING COSTS
5. INSURANCE WHILE IN TRANSIT
6. BROKER’S COMMSSIION
COST OF CONVERSION includes direct labor and factory overhead.
As to allocation basis for FOH:
o VARIABLE FOH – ACTUAL CAPACITY
o FIXED FOH – NORMAL CAPACITY
Other capitalizable costs:
o Normal losses
INVENTORIES
o TRACEABLE administrative expenses
o Storage cost of finished goods if related to raw materials or WIP.
Subsequent measurement: LOWER OF COST OR NET REALIZABLE VALUE.
Applied on an ITEM-BY-ITEM BASIS except for RAW MATERIALS and FACTORY SUPPLIES.
Net realizable value
FINISHED GOODS/MERCHANDISE INVENTORIES ESP – ECTS
WORK IN PROCESS ESP – ECTS – ECTC
RAW MATERIALS AND FACTORY SUPPLIES CURRENT REPLACEMENT COST
*ESP = ESTIMATED SELLING PRICE
ECTS = ESTIMATED COST TO SELL
ECTC = ESTIMATED COST TO COMPLETE
Entry to recognize the loss on purchase commitment: dr. Loss on purchase commitments; cr. Estimated liability on
purchase commitments.
Inventory estimation computations:
Estimated ending inventory XXX
Undamaged inventories @ cost (goods in transit) (XXX)
Damaged inventories @LCNRV (XXX)
TOTAL INVENTORY LOSS XXX
Estimated ending inventory XXX
Inventory based on count (XXX)
INVENTORY SHORTAGE XXX
GROSS PROFIT METHOD:
COGAS XXX
ENDING INVENTORY (SQUEEZE) XXX
COGS XXX
Under GROSS PROFIT METHOD, SALES RETURNS ARE ONLY DEDUCTED to arrive at net sales.
RETAIL INVENTORY METHOD:
COST RETAIL
Beginning inventory XXX XXX
Purchases XXX XXX
Freight in XXX
Purchase discounts (XXX)
Purchase returns and allowances (XXX) (XXX)
Departmental transfer-in (debit) XXX XXX
Departmental transfer-out (credit) (XXX) (XXX)
Abnormal losses (XXX) (XXX)
Net mark-ups XXX
Net markdowns (XXX)
TOTAL GOODS AVAILABLE FOR SALE XXX XXX
ENDING INVENTORY (SQUEEZE) XXX XXX
COST OF GOODS SOLD XXX XXX
COGS @ RETAIL: GROSS SALES less SALES RETURNS plus EMPLOYEES DISCOUNT plus NORMAL
LOSSES.
COGS @ COST: TGAS@ COST less ENDING INVENTORY @ COST.
ESTIMATED ENDING INVENTORY @ COST: (ENDING INVENTORY AT RETAIL X COST RATIO).
COST RATIOS:
o AVERAGE METHOD: (TGAS @ COST/ TGAS @RETAIL)
o FIFO: (TGAS @ COST – BEG, INVTY @ COST) / (TGAS @RETAIL - BEG, INVTY @ RETAIL)
o CONSERVATIVE METHOD: (TGAS @ COST/ TGAS @RETAIL + NET MARKDOWNS).