INTACC 1 ( Assets) Inventories Lecture Notes on Theories PDF

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Inventories Related Standard to the Topic: IAS 2 Inventories - “provides guidance for determining the cost of inventories and the subsequent recognition of the cost as an expense, including any write-down to net realizable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.” - Requires that inventories be measured at the lower of cost and NRV (ano yung mas mababa sa kanila) - Acceptable methods of determining costs are also outlined Inventories - assets that are either held for sale, in the process of production, in the form of materials and supplies to be consumed in the production process or in the rendering of services. - Gawa na at ibebenta sa ordinary course of business - Ginagawa palang para ibenta - Raw materials na ginagamit para sa pag bebenta ng goods or services Recognition - when they meet the definition of inventory and they qualify for recognition as assets– such as when control or the legal title is obtained by the buyer from the seller. - Transfer of control may come before, during, or after the transfer of physical possession over the goods. Consideration on all relevant facts are done in order to determine who has control over the inventories. Arrangements ; Inventory Included in the Inventory of 1. Goods in Transit The control and ownership over the assets depend on the sale terms agreed upon by the buyer and seller. (1) FOB shipping point BUYER and (2) FOB destination SELLER. Freight charges are also considered using these terms for shipping costs. i. (1) Freight Prepaid - babayaran na ni seller yung freight, ii. (2) Freight Collect - kokolektahin kay buyer kapag natanggap niya yung goods, iii. (3) FAS (free alongside) - seller assumes all expenses in delivering the goods to the dock next to the carrier on which the goods are to be shipped, upon shipment to the carrier ang transfer of title iv. (4) Ex-ship - seller assumes all expenses until the goods are unloaded from the carrier, when goods are unloaded from the carrier ang transfer ng title v. (5) CIF (cost, insurance, freight) - buyer pays in lump sum the cost, insurance, and freight, vi. (6) CF (cost and freight) - buyer pays in lump sum the cost of the goods and the freight cost. vii. (5) CIF and (6) CF - seller must deliver the goods to the carrier and pay the costs of loading, upon delivery ng goods sa carrier ang transfer ng title

GENERAL RULE: kung sino ang may ownership sa goods, sila dapat ang magbayad ng cost of freight or freight costs

2. Consigned Goods CONSIGNOR

Freight and Incidental Costs of Transferring Consigned Goods = part of cost Repair Costs for Damages (during shipment and storage) and other maintenance costs = charged as expense Commissions to the Consignee = charged as expense by Consignor, income by Consignee 3. Inventory Financing Agreements a. When inventories are sold under various forms of financing agreements: i. Product Financing Agreement BORROWER - continuous purchase; pagkilala sa asset at liab ii. Pledge of Inventory BORROWER - inventories as collateral security for a loan; no transfer of control over asset; nasa borrower pa rin ang ownership over inventories. Warehouse financing - may third party na involved na siyang humahawak ng inventory; receipts are given to the creditor to evidence the relationship iii. Loan of Inventory - borrowing inventory from another entity and then replacing it with the same kind; there is transfer of control over assets; kasama na sa inventory ni borrower yung inventories na hiniram niya 4. Sale with Unusual Right of Return BUYER As a GENERAL RULE: nirerecord na ni buyer yung mga binili niya na goods for sale na may kasamang right of return at the time of sale unless hindi qualified ang goods for recognition as asset.

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if hindi pambenta, hindi isasama sa inventory. Kapag may defect, hindi na ibebenta, kapag balak ibalik sa seller, hindi isasama sa inventory.

5. Sale on Trial or Sale on Approval SELLER a. Testing ganorn. The seller gives a prospective buyer to use a good for a given period of time, if satisfied ang customer during that period of time, bibilhin niya, if not, ibabalik niya sa seller. b. Walang nagaganap na transfer of ownership unless approve na ni customer at gusto niya talagang bilhin. During the trial period, the goods being tried are kept in the seller’s inventory c. May cases na kapag dumating yung certain point at wala pa ring desisyon si buyer, icconsider na siya na sold kasi nag lapse na yung trial period. 6. Installment Sale SELLER a. A form of sale wherein natransfer na yung goods from buyer to seller pero yung legal title ay nasa seller pa rin. This is done to protect the collectibility of the amount due to the seller. Nagkakaroon lang ng transfer of legal title at the point of sale– kapag nabayaran na. 7. Bill-and-Hold Sale BUYER a. An arrangement wherein the seller bills the custom but retains physical possession of the goods until it is transferred to the customer at a future date. The goods are excluded from the seller’s inventory and transferred to the buyer’s. Buyer na ang may legal title pero nasa seller pa rin ang goods. 8. Layaway Sale SELLER a. Goods are only delivered kapag nagbayad na ng final payment niya in a series of installment. Financial Statement Presentation - “Inventories” and the breakdown of the inventories into finished goods, work in process, and raw materials and manufacturing supplies are disclosed in the notes. ACCOUNTING FOR INVENTORIES Major objectives: determine periodic income by recognizing appropriate costs that are matched with revenue; determine inventories recognized as assets

Perpetual Inventory System

Periodic Inventory System

“Inventory” account is updated each time a purchase or sale is made. (continuing or running balance)

“Inventory” account is updated only when a physical count of inventory is performed. Accordingly, COGS - determined periodically (no running or continuing balance of inv)

No need physical count of inventories to determine the cost goods sold

Quantity of inv at physical count x cost/unit = inventory (end.) Formula is used to determine COGS*

Increases and decreases are accounted for in the “Inventory” account.

Purchases = purchases acc (d) Shipping costs = freight-in acc (d) Purchase returns = purchase returns acc (c) Purchase discounts = purchase disc acc (c)

“Cost of Goods Sold” is updated each time a sale or sale return is made

No entry for COGS

Sale = increases the cost of goods sold Sale return = decreases the cost of goods sold Normal Bal of COGS - Debit Commonly used for inventories that are specifically identifiable and are relatively high valued.

Commonly used for inventories that are interchangeable, relatively low valued, and have a fast turnover rate

When the Perpetual Inventory System is used, pwedeng magkaroon ng difference between the physical inventory count and the balance ng perpetual inventory. The difference leads to either a shortage or an overage in inventory. The physical count is still more makatotohanan. Physical Count < Perpetual Inventory Balance = Shortage Physical Count > Perpetual Inventory Balance = Overage Kapag shortage = loss Kapag overage = gain Normal spoilage caused shortage = charged to cost of goods sold Abnormal spoilage caused shortage = charged as loss Inventory Errors under the Periodic Inventory System COGS = affected by errors in the ending inventory, beginning inventory, and net purchases COGS misstated = Profit misstated Ending Inventory : Profit = Direct Relationship Beginning Inventory and Purchases : Profit = Inverse Relationship Ending Inventory : Cost of Goods Sold = Inverse Relationship Beginning Inventory and Purchases : Cost of Goods Sold = Direct Relationship Contra-purchases Accounts : Profit = Direct Relationship Adjunct-purchases Accounts : Profit = Inverse Relationship...