Selling and Period Expenses Selling and Administrative

INVENTORIES Administrative

 Assets held for sale in the ordinary course of business (finished Manufacturing Company:
Costs Balance Sheet Income Statement
goods)
Inventories Expenses
 Assets in the production process for sale in the ordinary course of Material Raw Material
business (WIP) Purchases
 Materials and supplies that are consumed in production (raw
Direct Labor Work In Process
materials)
 Purchased subcomponents Manufacturing
 Goods held by a trader for sale Overhead Finished Goods Cost of goods sold

Selling and Period Expenses Selling and Administrative

INITIAL RECOGNITION Administrative

 The entity controls the asset as a result of past event, and T-ACCOUNTS
 Probable that future economic benefits will flow to the entity Direct / Raw Material Work in Process
Beg. xx xx End. Beg. xx xx End.
INITIAL MEASUREMENT: COST OF INVENTORIES Net Purchases xx xx DM used DM used xx xx COGM
DL xx
 shall comprise all costs of purchase, costs of conversion and other APPLIED FOH xx
costs incurred in bringing the inventories to their present location Finished Goods
Beg. xx xx End.
and condition.
COGM xx xx COGS

Cost of Purchase
1. Purchase Price
STATEMENT OF COST OF GOODS MANUFACTURED AND SOLD
2. Import Duties and Other taxes (other than those recoverable)
RM inventory, beg. xx
3. Transport, handling and other cost directly attributable to the acquisition
of finished goods, materials and services. Add: Net purchases
Purchases xx
* any trade discounts, rebates and other similar items are deducted in determining cost Freight-in xx
of purchase. Purchase Returns and Allowances (xx)
* when an inventory is bought on a deferred credit terms, the excess of price paid over
the amount to be paid under normal credit terms is recognized as interest expense. Purchase Discounts (xx) xx
Raw Materials available for use xx
Cost of Conversion RM, end (xx)
1. Variable production overheads- based on the actual use Raw Materials used xx
2. Fixed production overheads- based on the normal capacity Direct Labor xx
3. Joint products- based on rational and consistent basis
Applied FOH xx
Total Manufacturing Costs xx
Other Costs
 included in the cost of inventories only to the extent that they are WIP, beg. xx
incurred in bringing the inventories to their present location and Total Cost of Goods placed in process xx
condition. WIP, end. (xx)
Cost of Goods Manufactured xx
1. Borrowing Costs FG, beg. xx
2. Storage Costs Total Goods available for sale xx
3. Non-production overheads or cost of designing products for specific
FG, end. (xx)
customers.
TOTAL COST OF GOODS SOLD xx
EXCLUDED FROM COST OF INVENTORIES
 abnormal amounts of wasted materials, labor or other production Items to be included in Inventory
costs
1. Goods in transit from supplier Whose inventory?
 Storage costs (unless essential to the production process)
 Administrative overheads unrelated to the production a. FOB shipping point buyer
 Selling costs b. FOB destination seller
 Foreign exchange differences 2. Consigned Goods (consignor) seller
 Interest costs when inventories are purchase in deferred basis. 3. Sales out on approval seller
4. Sales with buyback agreement seller
Note:
5. Sales with right of return buyer
 Invoice price means the quantity discount or trade discount was already
deducted. 6. Sales in installment buyer
7. Segregated goods in the warehouse
INVENTORIES OF MERCHANDISING AND MANUFACTURING a. special order goods buyer upon completion
COMPANIES b. hold for shipping instructions seller

Flow of Costs: REPURCHASE AGREEMENTS

Merchandising Company
Costs Balance sheet Income Statement  A contract in which an entity sells an asset and also promises or
Inventories Expenses has the option (either same contract or in another contract) to
Merchandise Merchandise repurchase the asset.
Purchases Inventories Cost of Sales
 Used for low volume high cost items Used for relatively low value inventory
Inventory is updated for each purchase, Updated only when the the FS are
Three forms (Control is not transferred to the customer)
sale and return of inventory prepared
(a) an entity’s obligation to repurchase the asset ( a forward); Physical count is performed for accuracy Physical count is performed to determine
i. repurchase price < original selling price - Lease (PFRS 16) of the balance per records the ending balance of the inventory and
ii. repurchase price >= original selling price – Financing Agreement to compute for COGS
ACCOUNT USED: Inventory ACCOUNT USED: Appropriate purchase
(b) an entity’s right to repurchase the asset ( a call option); accounts
i. repurchase price < original selling price - Lease (PFRS 16)
ii. repurchase price >= original selling price – Financing Agreement
(c) an entity’s obligation to repurchase the asset at the customer’s request
TRANSACTION PERPECTUAL
(put option. 1. To record purchase and Inventory xx
i. customer has significant economic incentive to exercise the freight-in Accounts payable/ cash xx
right- Lease (PFRS 16)/ financing agreement 2. To record purchase returns, Accounts payable xx
discounts and/or allowances Cash xx
ii. customer has no significant economic incentive to exercise the
3. To record sales and cost of Cash/Accounts Receivable xx
right- account as if it were a sale with right of return inventory sold Sales xx

Note: COGS xx
 If the repurchase agreement is a financing agreement, the entity shall Inventory xx
4. To record sales return Sales return xx
continue to recognize to recognize the asset and the financing liability.
A/R xx
 If the option has lapses unexercised, an entity shall derecognize the liability
and recognize revenue. Inventory xx
COGS xx
5. To record sales allowance or Sales allowance/discount xx
CONSIGNMENT ARRANGEMENTS discounts A/R xx
 Product is delivered to another party (consignee) may be held in a 6. Closing Entries No Closing entries
consignment arrangement if that other party has not obtained 7. To record inventory Loss on inventory shortage xx
shortage or shrinkage Inventory xx
control of the product.
PERIODIC
INDICATORS: (not limited to:) 1. To record purchase and Purchases xx
a.) the product is controlled by the entity until specified period occurs freight-in Freight in xx
b.) the entity is able to require the return of product or transfer the product A/P xx
2. To record purchase returns, Accounts payable xx
to a third party’
discounts and/or allowances Purchase Return/Allowances/discounts xx
c) the dealer does not have an unconditional obligation to pay for the 3. To record sales and cost of Cash/Accounts Receivable xx
product. inventory sold Sales xx
4. To record sales return Sales return xx
A/R xx
 The consignor shall not recognize revenue upon delivery of a 5. To record sales allowance or Sales return xx
product to the consignee. The consignor shall recognize revenue discounts A/R xx
when: 6. Closing Entries Inventory end xx
COGS xx
a. the consignee sold the product to the customer,
b. after expiration of a specified period. COGS xx
Purchase Return and Allowances xx
ACCOUNTING FOR CONSIGNMENT OF INVENTORIES Purchases xx
Freight in xx
TRANSACTION CONSIGNOR Inventory beg. xx
1. Shipment of goods on Inventory on consignment xx 7. To record inventory No Journal Entry
consignment Finished Goods xx shortage or shrinkage
2. Payment of expenses by the Inventory on consignment xx
consignor Cash xx
3. Payment of expenses by the Inventory on consignment xx TWO METHODS OF ACCOUNTING FOR PURCHASES
consignee Consignee payable xx  Gross Method
4. Sale of merchandise No entry
- purchases are recorded at invoice price
5. Notification of sale to the Commission Expense xx
consignor and payment of cash Cash xx - purchase discount is recorded when taken only- Purchase Discounts
due Consignee payable xx account.
Consignment sale revenue xx  Net Method
Cost of goods sold xx - recorded at invoice prices net of cash discounts (whether taken or
Inventory on consignment xx not)
CONSIGNEE - purchase discount are recorded only when not taken- Purchase
1. Shipment of goods on No entry ( memo entry ) Discounts Lost account.
consignment
2. Payment of expenses by the No entry
consignor Gross and Net Method (periodic inventory)
3. Payment of expenses by the Consignor receivable xx TRANSACTION GROSS METHOD
consignee Cash xx 1. Purchases Purchases (invoice price) xx
4. Sale of merchandise Cash xx A/P xx
Consignor payable xx 2. Purchase Return A/P xx
5. Notification of sale to the Consignor payable xx Purchase Return (invoice price) xx
consignor and payment of cash Commission revenue xx 3. Payment within the discount A/P xx
due Consignor receivable xx period Purchase Discounts xx
Cash xx Cash xx
4. Payment beyond the A/P xx
TWO SYSTEMS OF ACCOUNTING FOR INVENTORIES discount period Cash xx
NET METHOD
PERPECTUAL PERIODIC
 1. Purchases Purchases (net of discounts) xx  Change in accounting policy under PAS 8 Accounting Policies,
A/P xx Changes in Accounting Estimates and Errors.
2. Purchase Return A/P xx
Purchase Return (net) xx  Applied retrospectively
3. Payment within the discount A/P xx
period Cash xx *EI, prior year using FIFO (year prior to change in inventory) xx
4. Payment beyond the A/P xx EI, prior year using WA (year prior to change in inventory) xx
discount period Purchase Discounts Lost xx OVERSTATED OR UNDERSTATED( if negative) EI xx
Cash xx
 If EI last year is OVERSTATED, NI and RE last year is overstated
Adjusting entry: RE xx
SUBSEQUENT MEASUREMENT OF INVENTORIES MI, beg. xx
Effect: (date of change)
 LCNRV (lower of cost or net realizable value) item by item - overstatement of BI
- NI is understated this year
NRV - RE, end is correct
 Estimated selling price less estimated cost of completion and the
estimated cost to make the sale.  If EI last year is UNDERSTATED, NI and RE last year is understated
1. Raw materials and factory supplies Adjusting entry: MI, beg. xx
- Replacement cost RE xx
2. Work in process or partially completed goods Effect: (date of change)
- Estimated selling price less estimated cost of completion and the - understatement of BI
estimated cost to make the sale - NI is overstated this year
3. Finished Goods - RE, end is correct
-Estimated Selling price less estimated cost to sell
PURCHASE COMMITMENTS
Write-Down and Reversal
 Non cancelable agreement to purchase goods sometime in the
 Write-down- EXPENSE (added to COGS)
future at a fixed price and fixed quantity
 Reversal- INCOME STATEMENT (deduction from COGS)
Accounting for Purchase Commitments
TRANSACTION JOURNAL ENTRIES
Two Methods of Accounting for LCNRV
1. Commitments to purchase No journal entry
1. Direct Method inventory in the future
Merchandise inventory beg. (at LCNRV) xx 2. The value of the inventory Loss on purchase commitments xx
Net Purchases xx purchased under purchase Liability on purchase commitment xx
commitment is determined to
TGAS xx be impaired
Merchandise inventory end (at LCNRV) (xx) 3. The goods are received Purchases (lower of purchase
COGS after inventory write down xx commitment and replacement cost) xx
Accounts Payable/ cash xx
2. Indirect Method
4. Recovery before goods are Liability on purchase commitment xx
Merchandise inventory beg. (at cost) xx received Gain on market recovery xx
Net Purchases xx
TGAS xx
Merchandise inventory end (at cost) (xx) FOREIGN CURRENCY INVENTORY TRANSACTIONS
COGS before inventory write down xx  Arises if a Philippine company will import or buy inventory from a
Loss on inventory write down xx foreign company and the payment is denominated I a currency of
Gain on reversal of inventory write down (xx) the foreign company.
COGS after inventory write down xx Accounting for Foreign Currency Transaction of Inventories
1. Date of Purchase. Record both the inventory and payable account at the
*gain or loss computed:
spot rate on the date of transaction.
Merchandise inventory beg. (at cost) xx
2. Reporting Date. Remeasure the monetary Items at the spot rate on the
Merchandise inventory end (at LCNRV) (xx)
Required Allowance xx reporting date in accordance with PAS 21. Foreign currency gain/loss is
Allowance for inventory write down (xx) included in P/L.
Loss or gain on inventory write down xx 3. Settlement Date. Record the amount paid using the spot rate on the
settlement date. Any difference between the amount paid and the recorded
COST FORMULA: liability is treated as gain/loss in P/L.
 To determine the amount of cost to be compared to the NRV
1. Special Identification of cost INVENTORY ESTIMATION
2. FIFO Uses of Estimate in Inventory Estimation
3. Weighted Average 1. Insurance purposes
Weighted Average (periodic method) 2. To prove correctness or reasonableness of such count
Unit cost= TGAS / Units available for sale
Cost of EI= unit cost x units in the EI TWO APPROACHES IN ESTIMATING THE VALUE OF INVENTORY
Cost of sale= unit cost x units sold 1. GROSS PROFIT METHOD
Formulas:
Change in Inventory Method 1. Gross Profit Based on SALES
Sales xx 100%
 COGS (xx) (75%)  PAS 2 requires either the average or FIFO approach ( but more particularly
Gross Profit xx 25% average cost approach ). The standard requires that the percentage used in
*Gross Profit= GP rate x Sales retail method should be the percentage that has been marked down below
COGS= Cost ratio x Sales its original selling price.

2. Gross Profit Based on COST Definition of terms:

Sales xx 125%  Initial Markup – original markup on the cost of goods or the
COGS (xx) (100%) amount added to the original cost to get the original retail price.
Gross Profit xx 25%  Original retail – sales price at which goods are first offered for
*Gross Profit= GP rate x Sales/Sales Ratio sale.
COGS= Sales/Sales Ratio  Additional Markup – increase in the sales price above the original
sales price or the amount added to the original retail price.
NOTE:  Markup cancellation – decrease in the sales price that does not
 In determination of sales for the purposes of using the gross profit method
reduce the sales price below the original sales price.
or retail method, sales discount and sales allowances are IGNORED. ONLY
 Net Markup – additional markup less markup cancellation.
sales returns are deducted to arrive at the amount of sales for the purpose
of determining the gross profit ratio.  Markdown – decrease in the sales price below the original sales
price.
Determining the Gross Profit rate  Markdown cancellation – increase in the sales price that does not
Average Gross Profit = GPR year 1 + year 2 + year n raise the sales price above the original sales price.
Number of Years  Net Markdown – additional markdown less markdown
Overall Gross Profit = GP year 1 + year 2 + year n cancellation.
Sales year 1 + year 2 + year n
 Maintained Markup (“markon”) – diferrence between cost and
Computation for the Inventory Fire Loss
sales price after adjustments.
Merchandising Company
Estimated Ending Inventory xx
Salvage/ Scrap Value (xx) Procedural Approach:
In- transit goods (owned by the client) (xx) 1. Compute the cost ratio.
Inventory out of consignment (xx) *FIFO = GAS at cost minus beg. inventory at cost
Other inventories owned by the client not in the warehouse during fire (xx) GAS at retail minus beg. inventory at retail
Inventory Fire loss xx *Average = GAS at cost
GAS at retail
Manufacturing Company *Conservative = GAS at cost
Estimated Ending Inventory, finished goods xx GAS at retail excluding markdowns
Salvage/ Scrap Value (xx) 2. Compute the ending inventory at retail.
Inventory out of consignment (xx) GAS at retail xx
Other inventories owned by the client not in the warehouse during fire (xx) Net sales
Inventory Fire loss xx Sales xx
Sales returns only (xx) (xx)
Estimated Ending Inventory, WIP xx Ending inventory at retail xx
Salvage/ Scrap Value (xx) 3. Compute the ending inventory at cost.
WIP inventories owned by the client not in the warehouse during fire (xx) Ending inventory at cost = cost ratio x Ending inventory at retail
Inventory Fire loss xx 4. Compute for cost of sales.
GAS at cost xx
Estimated Ending Inventory xx Ending inventory at cost (xx)
Salvage/ Scrap Value (xx) Cost of Sales xx
Raw materials in- transit (owned by the client) (xx)
Raw materials owned by the client not in the warehouse during fire (xx)
Inventory Fire loss xx
Accounting Treatment:
2. RETAIL INVENTORY METHOD  Purchase discounts- deducted at purchases at cost only.
 The ratio exploited using this method is not the gross profit ratio but rather  Purchase returns- deducted at purchases at cost and retail.
the cost ratio.  Purchase allowances- deducted at purchases at cost only.
Basic Formula:  Freight in- added at purchases at cost only.
Goods available for sale at retail xx  Sales discount- disregarded.
Net sales  Sales allowances- disregarded.
Sales xx  Sales returns- deducted from sales. If term is sales return and allowances it
Sales returns only (xx) (xx) is to be deducted.
Ending inventory at retail xx  Employee discount- added to sales.
Cost ratio %  Normal shrinkage, spoilage ad breakage- deducted from GAS at retail only.
Ending inventory at cost xx  Abnormal shrinkage, spoilage ad breakage- deducted from GAS at retail
and cost.
METHODS IN COMPUTING COST RATIO  Departmental transfer in or debit- addition to purchases at cost and retail.
METHODS BEGINNING MARKUPS MARKDOWN  Departmental transfer out or credit- deduction from purchases at cost and
INVENTORY retail.
1. Conservative/ Include Include Exclude
Conventional/ LCM
Summary of items to be added (deducted ) to cost and retail columns.
2. Average Include Include Include
3. FIFO Exclude Include Include COST RETAIL
At cost only:
NOTE: Freight in xx
Purchase allowances (xx)
 Purchase discounts (xx)
At retail only:
Markup xx
Markup cancellation (xx)
Markdown (xx)
Markdown cancellation xx
Normal shrinkage, (xx)
spoilage ad breakage
Employee discount (xx)
At cost and retail:
Beginning inventory xx xx
Purchase xx xx
Purchase return (xx) (xx)
Departmental transfer xx xx
in or debit
Departmental transfer (xx) (xx)
out or credit
Abnormal shrinkage, (xx) (xx)
spoilage ad breakage

DERECOGNITION
 Expense, in the period in which the related revenue is recognized
( often called as COGS)

INVENTORY ERROR
1. OVERSTATED - Year 1:
Cost of sales- understated
Net income- overstated
Retained earnings- overstated
Year 2:
Cost of sales- overstated
Net income- understated
Retained earnings- correct
2. UNDERSTATED- Year 1:
Cost of sales- overstated
Net income- understated
Retained earnings- understated
Year 2:
Cost of sales- understated
Net income- overstated
Retained earnings- correct

NOTES FOR SME’S

Initial Measurement- cost plus any directly attributable cost
Subsequent Measurement- Lower of cost or estimated selling price less costs
to complete and sell. NRV is not use under SME’s.