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onal Review and Training Center

Inventories
(ToA.203)
L. R. Cabarles

Relevant Standard
PAS 2 Inventories

Nature of Inventories
Inventories include
Assets held for sale in the ordinary
course of business (finished goods)
Assets in the production process for
sale in the ordinary course of business
(work in process), and
Materials and supplies that are
consumed in production (raw
materials)

What
What should
should be
be included
included in
in
inventories?
inventories?
All items substantially owned by
the entity should be included in
inventory regardless of location.

Measurement
Measurement of
of inventories
inventories
Inventories are required to be
stated at the lower of cost and
net realizable value (NRV).

Items included in cost

costs of purchase

costs of conversion
(Direct labor and overhead)

other costs incurred in bringing the


inventories to their present location and
condition
(e.g. costs of designing products for specific
customers)

Costs of Purchase

Purchase price

Import duties and other non-refundable


taxes

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

Recording
Recording of
of Purchases
Purchases

Gross
Gross and
and Net
Net Method
Method
Gross
Cash
discounts

Net

Recording
Recording of
of Purchases
Purchases

Gross
Gross and
and Net
Net Method
Method
Gross
Cash
discounts

Deducted from
purchases when
taken

Net

Recording
Recording of
of Purchases
Purchases

Gross
Gross and
and Net
Net Method
Method
Cash
discounts

Gross

Net

Deducted from
purchases when
taken

Deducted from
purchases
whether taken or
not

Accounts
Recording
payable
of
(Gross)

Recording
of Purchases
Purchasesxx

Cash (Net)
Gross
and
Gross
and Net
Net Method
Methodxx
Purchase discounts
xx
Cash
discounts

Cash
discounts
taken

Gross

Net

Deducted from
purchases when
taken

Deducted from
purchases
whether taken or
not

Accounts
Recording
payable
of
(Gross)
(Net)
xx xx

Recording
of Purchases
Purchases

Cash (Net)
Gross
and
Gross
and Net
Net Method
Methodxx
Purchase discounts
xx

Gross

Net

Cash
discounts

Deducted from
purchases when
taken

Deducted from
purchases
whether taken or
not

Cash
discounts
taken

Deducted from
purchases
(purchase
discounts)

Accounts
Recording
payable
of
(Net)
xx
Recording
of Purchases
Purchases

Cash (Net)
Gross
and
Gross
and Net
Net Method
Methodxx

Gross

Net

Cash
discounts

Deducted from
purchases when
taken

Deducted from
purchases
whether taken or
not

Cash
discounts
taken

Deducted from
purchases
(purchase
discounts)

Already deducted
from purchases

Accounts
Recording
payable
of
(Gross)

Recording
of Purchases
Purchasesxx

Cash (Gross)
xx
Gross
and
Gross
and Net
Net Method
Method

Gross

Net

Cash
discounts

Deducted from
purchases when
taken

Deducted from
purchases
whether taken or
not

Cash
discounts
taken

Deducted from
purchases
(purchase
discounts)

Already deducted
from purchases

Cash
discounts
not taken

Accounts
Recording
payable
of
(Gross)
(Net)
xx xx

Recording
of Purchases
Purchases

Purchase
Cash (Gross)
discounts
xx xx
Gross
and
Method
Gross
and Net
Netlost
Method
Cash (Gross)
xx

Gross

Net

Cash
discounts

Deducted from
purchases when
taken

Deducted from
purchases
whether taken or
not

Cash
discounts
taken

Deducted from
purchases
(purchase
discounts)

Already deducted
from purchases

Cash
discounts
not taken

Included in
purchases
(part of inventory
cost)

Accounts
Recording
payable
of
(Net)
xx
Recording
of Purchases
Purchases

Purchase
Gross
and
Method
Grossdiscounts
and Net
Netlost
Methodxx
Cash (Gross)
xx

Gross

Net

Cash
discounts

Deducted from
purchases when
taken

Deducted from
purchases
whether taken or
not

Cash
discounts
taken

Deducted from
purchases
(purchase
discounts)

Already deducted
from purchases

Included in
purchases
(part of inventory
cost)

Reported as
other expense

Cash
discounts
not taken

Cost Formulas
Specific identification
For items that are not ordinarily
interchangeable
Goods or services produced and
segregated for specific projects
FIFO or Weighted Average Cost
For all other items

Cost
Cost Formulas
Formulas
Specific identification
Cost of EI = Units on hand x Specific UC
FIFO
Cost of EI:
Units on hand x UC of latest purchases
Weighted Average
Cost of EI = Units on hand x WAUC
WAUC = Total cost of GAS/
Total units available for sale

Measurement
Measurement of
of inventories
inventories
Inventories are required to be
stated at the lower of cost and
net realizable value (NRV).

What
What is
is net
net realizable
realizable value
value
(NRV)?
(NRV)?
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.
NRV = ESP ECTC - ECTS

Purchase
Purchase Commitment
Commitment
This purchase commitment is an
executory contract. It is not
recognized in the financial
statements unless it is an
onerous contract.

Inventory
Inventory Estimation
Estimation
Techniques
Techniques
- Gross profit rate
- Retail inventory
- Standard cost

Gross Profit Rate


(GPR) Method

GPR Method

Technique based on a relationship


between gross profit and sales that is
assumed to be fairly stable

Its use is not appropriate for financial


reporting purposes

However, it may be useful when


auditors need approximations or
when inventory and inventory records
are destroyed by fire or some other
catastrophe

COS
COS Formula
Formula (Trading)
(Trading)
Inventory, beginning
Purchases, net
TGAS
xx
Inventory, ending
Cost of sales
P

xx
xx

(
xx

TGAS
P xx
Cost of sales
( xx)
Estimated inventory
P xx

xx)

COS Computation
GPR based on SALES
COS = Net Sales x Cost Ratio
Cost ratio = 1 - GPR
GPR based on COST
COS = Net Sales / (1+GPR)

Retail Inventory Method

Technique based upon an


observable pattern between cost
and sales price that exists in
most retail concerns.

Basically requires the


computation of the cost-to-retail
ratio of inventory available for
sale.

Retail Inventory Method

Cost ratio = GAS@cost / GAS@retail

Markdown
Beg. Invty.
Method
EI at retail
= GAS@retail

Conventional Exclude
Include
Sales (+/- other invty adj.)
Average

Include
Include
(Deduct)
EI at cost = EI at retail x cost ratio
FIFO
Include
Exclude
(Deduct)

Methods:

- Conventional/Conservative/LCM
- Average
- FIFO

Retail Inventory Method


Original selling price
150
Cost
100
The percentage
used takes into
consideration
inventory
that has been
Initial
markup
50
marked
down
to
below
its
original
New selling price
180
selling price.
Additional markup
30
selling
pricepercentage
160 for each retail
New
An
average
Markup
cancellation
20
department
is often used.
New selling price
130
Markup cancellation
10
Markdown
20
New selling price
145
Markdown cancellation
15

STQ Answers
1.
2.
3.
4.
5.

A
C
A
B
B

STQ Answers
6.
7.
8.
9.
10.

B
D
D
D
D

STQ Answers
11.
12.
13.
14.
15.

C
D
D
B
D

STQ Answers
16.
17.
18.
19.
20.

B
A
A
D
C

STQ Answers
21.
22.
23.
24.
25.

D
B
B
C
D

STQ Answers
26.
27.
28.
29.
30.

B
D
D
C
D

end of ToA.203