Inventories

Examples: Materials and supplies, goods in process, finished goods.

Who owns? -> Passing of title/change of ownership

Who is the owner of goods in transit (who SHOULD pay for the freight)
> FOB Destination
>FOB Shipping point
>FAS/Free along side
>CIF or Cost Insurance and Freight
>Ex-ship
>FOB Seller

Who owns consigned goods?

> Freight to consignee (freight-in) and other hadnling charges will be part of the cost of goods
consigned
Who owns the goods under these contracts:
1. Installment Sales
2. Sale on Trial/Approval
3. Sale or Return
4. Bill and Hold- Sale in which delivery is delayed at the buyer 's request but the buyer asusmes
title and accepts the invoice
5. Layaway saes (contract to sell)

Freight terms (who will pay the freight)

1. Freight collect
2. Freight Prepaid

**normal losses -> closed to COGS (FAR), may be shared by good units (Cost accounting)
Abnormal losses-> always treated as LOSS in any accounting subject.

How do we allocate OVERHEAD (for FAR purposes only)?

1. Fixed Cost - Allocated based on normal capacity
2. Variable cost - allocated base on actual use

Treatment for storage cost in goods in process and finished goods?

Trade vs Cas Discounts

List price vs Invoice Price

Periodic vs Perpetual inventory system

Gross vs Net method of recording purchases

 Inventory Valuation
COST FORMULAS

1. FIFO (if silent) - either periodic or perpetual, COGS and ending inventory are the same
1.1 Periodic (if silent)
1.2 Perpetual

2. WEIGHTED AVERAGE
1.1 Periodic (if silent) - inventory unit cost = TGAS (cost)/(TGAS (units)
1.2 Perpetual a.k.a Moving average - new weighted average unit cost is computer after every
purchase and purchase returns
X LIFO - not anymore accepted as per PAS 2

> Specific Identification Method

How do we measure ending inventory?

*apply conservatism
~> Lower of Cost and Net Realizable Value (LCNRV)

Cost = Purchase price (net of trade and cash discount) + freight in + import duties + Irrevocable taxes +
handling cost+other cost directly attributable to the purchase

NRV = estimated selling price (NOT fair value!) - estimated cost to complete - estimated cost of disposal
*apply NRV as an ITEM per ITEM or INDIVIDUAL basis (based on PAS 2)

COST< NRV its ok, no writedown necessary

COST>NRV writedown inventory to NRV(loss on inventory writedown/impairment loss)

How to record loss on inventory writedown?

1. Direct/COGS Method - Loss is buried on COGS
2. Allowance/Loss Method (preferred) - loss is accounted for sperately (set up allowance for
inventory writedown account)

Basket/Lump Sum/ Single Cost Purchase = allocate using relative sales price

Purchase commitment (application of LCNRV)

> Recognized loss (Purcahse price per contract less current purchase price or replacement cost)
< IGNORE (excess of purchase price per contract over current purchase price) if current purchase
price is higher
** like PPE under Cost model (conservatism)

For Theory of Accounts purposes:

> Inventories of agricultural, forest and mineral products are measured at NRV
> Inventories of Broker - Traders - measured at FV less Cost of Disposal
 BIOLOGICAL ASSETS ( NCA if silent)

Valuation: PAS41 (FV less Cost to Sell) - Biological Assets & Agricultural produce (at point of harvest)
PAS2 (LCNRV) - AFTER harvest

Under PAS 41 only -> Cost to Sell/Disposal excludes Transportation Cost

*Finance cost and income taxes are always excluded in inventory valuation

PrA - Price Change, same AGE

PhD - Physical Change, same DATE (12/31)

Amendments:
*Bearer plants (e.g, trees, grapes vines - can harvest agrcultural produce in more than one period)
>accounted for under PAS 16 PPE and not under PAS 41 Agriculture because bearer plants are used
solely to grow agricultural produce over SEVERAL periods like PPE in manufacturing goods and
being sold as "scrapped" after its productive life (similar to PPE as well)

Not considered bearer plants:

1. Trees harvested and sold as log/lumber
2. Annual crops

> Plant with dual use (use to produce agricultural produce and plant itself can be sold) - still biological
asset.
> Immature bearer plant- as if CIP, all cost are capitalized (even borrowing cost) until bearer plant already
reached maturity
>Bearer animals - still considered as biological assets.

Why do we need to estimate?

a. Test of Reasonableness
b. Due to fortuitious (fire/theft) event, we need to estimate the losses.
c. Interim reporting (no time for actual inventory count - costly as well)

METHODS OF INVENTORY ESTIMATION

General Rule for both methods: include purchase discount and allowances but ignore sales Discount
and allowances

1. Gross Profit Method

TGAS - COGS (being computed) = Ending Inventory

COGS = NET sales times Cost Ratio

Net Sales Divided by Sales Ratio
Net sales minus GP
NET Sales - Sales minus sales returns only ( ignore sales allowance and discount)

2. Retail Inventory Method

Cost ratio = TGAS at Cost/TGAS at selling Price

Ending inventory = Ending Inventory at Selling Price * Cost Ratio

*ignore also sales discount and allowances

Note: Departmental Transfer In (add to purchases), Departmental Transfer OUT (Deduct to purchases)
Employee Discount and Normal Spoilage - add to sales (deduction to TGAS at selling price)

2.1 Conservative/Conventional/LCNRV Approach (Non-GAAP)

2.2 Average Cost Approach (GAAP_
2.3 FIFO Approach ( non- GAAP)