Inventories PDF

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Chapter 16: InventoriesIncluded ExcludedGoods owned and on hand ✓Goods out on consignment ✓Goods in the hand ofsalesmen/agents✓Goods held by customers onapproval/on trial or out on approval✓Goods out on consignment/onconsignment with a customer✓Goods held on consignment/onconsignment with a vendor✓G...

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Chapter 16: Inventories Included

Goods owned and on hand Goods out on consignment Goods in the hand of salesmen/agents Goods held by customers on approval/on trial or out on approval Goods out on consignment/on consignment with a customer Goods held on consignment/on consignment with a vendor Goods segregated per sales contract Goods in shipping/receiving department Unexpired insurance Advertising catalogs and shipping carton Goods returned Goods returned for replacement Shipping supplies Gasoline and oil for testing finished goods Machine lubricants Goods custom-made for specific customers Goods sold and held for the customer to call for the customer’s convenience Goods marked “hold for shipping instructions” Interest on inventory loan Interest on qualifying asset Goods under purchase commitment, not yet received

✓

✓ ✓

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

✓ ✓ ✓ ✓

Buyer

Goods in transit, destination Goods in transit, Goods in transit, shipping point Goods in transit, (Free alongside) Goods in transit,

Excluded

✓ ✓ ✓

sold FOB

Seller

✓

sold ex-ship sold FOB

✓

✓

sold FAS

✓

sold CIF/CF

✓

(Cost, Insurance and Freight) Goods in transit, sold FOB supplier’s warehouse Goods in transit, sold FOB seller Materials in transit Finished goods in transit

Purchase of merchandise on account Payment of freight on purchase Return of merchandise purchased Payment to seller within the discount period

Sale of merchandise on account

Periodic/Non-cost Purchases xx AP xx Freight in xx Cash xx AP xx Purchase Return xx AP xx Cash xx Purchase discount xx AR xx Sales xx

Return of merchandise sold

Sales return xx AR xx

Receipt of payment from buyer within the discount period

Cash xx Sales discount xx AR xx Merchandise Inty. xx Income summary xx

Adjustment of ending inventory

✓ ✓ ✓ ✓ Perpetual/Cost Merchandise Inty. xx AP xx Merchandise Inty. Cash xx

xx

AP xx Merchandise Inty.

xx

AP

xx Cash

xx COGS xx AR xx Sales xx # COGS xx Merchandise Inty. xx Sales Return xx AR xx # Merchandise Inty. xx COGS xx Cash xx Sales discount xx AR xx No entry.

TRADE DISCOUNTS AND CASH DISCOUNT List price xx Less: Trade discount (not recorded) xx Invoice price xx Less: Cash discount xx Payment within the discount period xx

METHODS OF RECORDING PURCHASES Purchase on account*

Payment within discount period

Payment beyond discount period

Gross method Purchases xx AP xx AP xx Purchase discount xx Cash xx AP xx Cash xx

No payment is No entry made and discount period has expired (Yearend adjustment) *Different values

Net method Purchases xx AP xx AP xx Cash xx

AP xx PD lost xx Cash xx PD lost xx AP xx

COST OF INVENTORIES 1. Cost of purchase  Purchase price, import duties and irrecoverable taxes, freight in (including freight to consignee), handling and other costs directly attributable to the acquisition  Trade discount and rebates – deducted  Foreign exchange differences – excluded  If purchased with deferred settlement terms, difference between the purchase price for normal credit terms and amount paid is recognized as interest expense. 2. Cost of conversion a. Direct labor b. Fixed production overhead o E.g., Depreciation and maintenance of factory building and equipment and cost of factory management and administration o Unallocated fixed overhead – expensed c. Variable production overhead o E.g., Indirect labor and indirect materials o By-products – measured at NRV and deducted from the cost of the main product 3. Other costs incurred in bringing the inventory to their present location and condition  E.g., cost of designing product for specific customers, storage costs on goods in process, factory administrative costs  Expensed as incurred: o Abnormal amounts of wasted materials, labor and production costs o o o

Notes:

Storage costs on finished goods Administrative overheads not directly attributable Distribution or selling costs (delivery costs, freight out)

      

Invoice not received –ignored; no bearing in inventory inclusion Cost of sales under periodic and perpetual inventory system are equal. Cost of sales under gross and net method are not equal. For purchases through import transactions, expenses related to import are capitalizable. Expenses related to subsequent export are expensed. The difference of the ending inventory and cost of sales between the gross and net method equals the total purchase discounts lost for the net method. If silent as to whether the inventory is included, assume included when received (for buyer) and when shipped (for seller). Inventoriable cost of purchase (amount at which purchase is recorded) – net purchases, including freight in

Chapter 17: Inventory Cost Flow FIRST-IN-FIRST-OUT (FIFO) METHOD A. FIFO Periodic Purchase date Dec. 31 Dec. 28 Ending inventory

Units xx xx xx

Unit cost xx xx

Total cost xx xx aa

Inventory, beg. Purchases, net of purchase return Goods available for sale Inventory, end Cost of goods sold

xx xx xx aa bb

B. FIFO Perpetual Dat e

1/1 1/8 1/9 1/3 1

Purchases Uni Uni Tota l t t cos cost t

xx

xx

Uni t

Sales Uni Tota l t cos cost t

xx

xx

xx

xx

xx

xx

xx

COGS

bb

WEIGHTED AVERAGE METHOD A. Weighted Average Periodic Total cost of goods available for sale ÷ Total units available for sale Weighted average unit cost × Units on hand Ending inventory Goods available for sale

Uni t

xx xx xx xx xx

Balance Uni Tota l t cos cost t xx xx xx xx xx xx xx xx xx xx

xx xx Ending Inty.

xx aa

xx xx xx xx aa xx

Less: Inventory, end Cost of goods sold

aa bb

B. Moving Average method (Weighted Average Perpetual) Dat e 1/1 1/8 1/12 1/20 1/30

Units Balance Sale Balance Purchase Balance Purchase return Balance Sale return Total

Unit cost aa aa aa bb cc dd ee ee ee

xx (xx) xx xx xx (xx) xx xx xx

Jan. 8 sale Jan. 30 sale return Cost of goods sold

Total cost xx (xx) xx xx xx (xx) xx xx xx

xx (xx) xx

SPECIFIC IDENTIFICATION METHOD Units

Ending inventory

xx xx xx

Actual cost xx xx xx

Total cost xx xx xx

RELATIVE SALES PRICE METHOD Product A Product B

Product A Product B Ending inventory

Selling price aa bb cc

Fractio n a/c b/c

Total cost

Unit cost

Unsold goods xx xx

Ending inventory xx xx xx

xx xx

xx xx xx

Notes:  Under FIFO-periodic and FIFO-perpetual, inventory and cost of goods sold are equal. However, inventory and COGS for weighted average-periodic is different from moving average.  Unit selling price is ignored.  For moving average, account for decimal places.  Cost of unsold goods is the ending inventory. Cost of sold goods is the cost of sales.  For manufacturing concern, treat raw materials purchased as purchases; units used/issued as sales.

Chapter 18: Lower of Cost or Net Realizable Value (LCNRV)

Estimated selling price xx Less: Estimated cost of disposal (and completion) xx Net realizable value (NRV) xx Total cost xx xx aa

Product A Product B

NRV

LCNRV

xx xx bb

xx xx cc

TWO METHODS OF ACCOUNTING FOR INVENTORY WRITEDOWN Direct/COGS method Inty., end (@LCNRV) cc IS cc

Allowance/Loss method Inty., end (@cost) aa IS aa

Inventory writedown

-

Reversal of inventory writedown

-

Computatio n of cost of goods sold

Inty., beg. (@LCNRV) xx Net purchases xx Total xx Less: Inty., end (@LCNRV) xx COGS xx

Loss on IW (aa-cc) xx Allowance for IW xx Allowance for IW xx Gain on reversal of IW xx Inty., beg. (@Cost) xx Net purchases xx Total xx Less: Inty., end (@Cost) xx COGS before IW xx Add: Loss (Gain) on IW xx COGS after IW xx

Record inventory at year-end

ALLOWANCE/LOSS METHOD Inventory writedown

Increase in allowance

Computation Cost xx Less: NRV xx Loss on IW xx Required allowance xx Less: Allowance bal. xx Increase in allowance xx

Journal entry Loss on IW xx Allowance for IW xx

Loss on IW xx Allowance for IW xx

Decrease in allowance

Required allowance xx Less: Allowance bal. xx Decrease in allowance (xx)

Allowance for IW xx Gain on reversal of IW xx

PURCHASE COMMITMENT Agreed price = 5,000 RC = 4,500 Case 1: Actual purchase: Current RC = 4,200 (< 5,000)

Case 2: Actual purchase: Current RC = 6,000 (>5,000)

Case 3: Actual purchase Current RC = 4,800 (4,500)

Journal entry Loss on PC 500 EL for PC 500 Purchases 4,200 Loss on PC (4,200 – 4,500) 300 EL for PC 500 AP 5,000 Purchases 5,000 EL for PC 500 AP 5,000 Gain on reversal (5,0004,500) 500 Purchases 4,800 EL for PC 500 AP 5,000 Gain on reversal (4,8004,500) 300

Notes:  COGS is equal for both direct and allowance method.  Gain on reversal of inventory writedown is limited only to the extent of the allowance balance.  Gain on purchase commitment is limited only to the loss on purchase commitment previously recorded.  Normal profit rate is ignored.  Expected market price decreased – no entry. Actual market price decreased – recognize a loss.  If NRV is not given, along with the factors (SP and COD), assume current replacement cost as the NRV.  If cost per cost flow assumption is not given, use the historical cost figure to compare with NRV.  If obsolete, assume zero NRV. If scrap value is given, use it as NRV.

Chapter 20: Gross Profit Method BASIC FORMULA Goods available for sale (GAS) Less: Cost of goods sold (COGS) Ending inventory

xx xx xx

GOODS AVAILABLE FOR SALE Beginning inventory xx Purchases xx Add: Freight in xx Total xx Less: Purchase return, allowance and discount Goods available for sale

xx xx

COST OF GOODS SOLD Gross profit Formula rate Net sales × Cost ratio Based on sales Net sales × (1 – Gross profit rate) Based on cost Net sales ÷ Sales ratio Net sales ÷ (1 + Gross profit rate)

Net sales COGS Gross profit (40%)

Based on sales 100% 60% 40%

Based on cost 140% 100% 40%

COMPUTATION OF GROSS PROFIT RATE Gross profit Formula rate Gross profit ÷ Net sales Based on sales Based on cost Gross profit ÷ Cost of goods sold COMPUTATION OF CASUALTY LOSS Inventory Less: Undamaged, at cost Damaged, at NRV Casualty loss

xx xx xx xx

xx

Notes:  If silent, assume gross profit rate based on sales.

xx

      

Ignore sales allowances and sales discount. Net sales is only net of sales return. If given sales return and allowances, deduct from sales. In first year of operations, purchases equals GAS. Net sales = Average AR x Turnover COGS = Average Inventory x Turnover If remaining inventory is given in selling price, multiply by cost ratio (or divide by sales ratio) to get the cost. Damaged inventory, whether partially or entirely damaged, is measured at NRV. Gross profit rate based on sales – lower COGS, higher inventory, higher gross profit

Chapter 21: Retail inventory method BASIC FORMULA Goods available for sale, at retail xx Less: Net sales (Gross sales less sales return only)xx Ending inventory, at retail xx × Cost ratio* xx Ending inventory, at cost xx

*Cost ratio =

GAS , at cost GAS , at retail

Beginning inventory Purchases Freight in Purchase return Purchase allowance Purchase discount Departmental transfer in/debit Departmental transfer out/credit Abnormal shortage, shrinkage, spoilage, breakage Goods available for sale (GAS) Cost ratio (GAS at cost/GAS at retail) = z% Less: Sales Sales return Employee discount Normal shortage, shrinkage spoilage, breakage Ending inventory, at retail Ending inventory, at cost

Cost xx xx xx (xx) (xx) (xx) xx

Retail xx xx

(xx)

(xx)

(xx)

(xx)

xx

xx

xx (xx) xx xx

xx

(xx)

xx

aa xx

(aa x z%) GAS, at cost Less: Ending inventory, at cost Cost of goods sold

xx xx xx

ITEMS RELATED TO RETAIL METHOD Cost 100 1 Initial markup Original retail/sales price 2 Additional markup +30 New sales price 3 Markup cancelation -20 New sales price (not below 110) Markup cancelation -10 4 Markdown -20 New sales price 5 Markdown cancelation New sales price (not above 110)

+10 110 140 120

90 +10 100

APPROACHES IN THE USE OF RETAIL METHOD 1. Conservative/Conventional/LCNRV/Lower of average cost or market approach 2. Average cost approach Cost Retail Beginning inventory xx xx Net purchases xx xx Net markup (xx) GAS – Conservative aa bb Cost ratio-conservative (aa/bb) (xx) Net markdown GAS- Average aa cc Cost ratio-Average (aa/cc) Less: Net sales xx Ending inventory, at retail dd Conservative cost (dd x %) xx Average cost (dd x %) xx 3. FIFO approach Beginning inventory Purchases Net markup Net markdown Net purchases Current year cost ratio (aa/bb) GAS-FIFO Less: Net sales

Cost xx xx

aa

xx

Retail xx xx xx (xx) bb

xx xx

Ending inventory, at retail FIFO Cost (cc x %)

cc xx

Notes:  Round off cost ratio to the nearest percent.  Do not disregard GAS at cost. This will be used for the computation of COGS.  Ignore sales discount and sales allowances.  Inventory shortage-sales price is added to sales.

Chapter 19: Biological Assets Asset Agricultural land Biological assets attached to land Bearer plants Agricultural produce on bearer plants Plants with dual use Bearer animals Animals related to recreational activities Asset Agricultural land Biological assets attached to land Bearer plants (a) Immature bearer plants (b) Mature bearer plants Agricultural produce on bearer plants (a) As it grows (b) Harvested produce Plants with dual use Bearer animals Animals related to recreational activities

Treatment PPE Biological asset PPE (Qualifying Asset) Agricultural produce Biological asset Biological asset PPE

Measurement Cost model or revaluation model Fair value less cost of disposal Cost model or revaluation model Accumulated cost Cost model or revaluation model Fair value less cost of disposal Fair value less cost of disposal Fair value less cost of disposal at the point of harvest Fair value less cost of disposal Fair value less cost of disposal Cost model or revaluation model

CHANGE IN FAIR VALUE Fair value at year-end – new category Less: Carrying amount Gain from change in fair value

xx xx xx

PRICE CHANGE AND PHYSICAL CHANGE Price change Physical change 1 (original) 2 (original and Category new) Date 2 (recognition 1 (year-end) date and year-end) Notes:  Always include in physical change any newborn, at fair value on the date of birth.  Fair value of milk produced – treated as sales  If asked total assets or total liabilities & equity, compute for total assets only. No need to compute for net income.  If given age, assume age at year-end.  Transport cost – excluded from cost of disposal

Chapter 16: Property, Plant and Equipment (PPE) ELEMENTS OF COST - PDI a. Purchase price, import duties and nonrefundable purchase taxes, less trade discounts and rebates b. Directly attributable costs c. Initial estimate of the cost of dismantling, removing the item and restoring the site on which it is located, the obligation for which the entity incurs. DIRECTLY ATTRIBUTABLE COSTS – ESD IPT 1. Costs of employee benefits 2. Cost of site preparation 3. Initial delivery and handling costs 4. I nstallation and assembly cost 5. Professional fees 6. Costs of testing whether the asset is functioning properly, less the net proceeds from selling any items produced while bringing the asset to the present location and condition, such as samples produced while testing equipment COSTS NOT QUALIFYING FOR RECOGNITION (OUTRIGHT EXPENSES) – OIC A IIR 1. Cost of opening a new facility 2. Cost of introducing a new product or service, including costs of advertising and promotion

3. Costs of conducting business in a new location or with a new class or customer, including cost of staff training 4. Administrative and other general overhead costs 5. Costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity 6. I nitial operating losses 7. Costs of relocating or reorganizing part or all of an entity’s operation Capitalized Appraiser’s fee Freight in/shipping charge Special horn for a van Freight and insurance Trial run and other testing costs Construction of base Noncurrent portion of insurance premium Irrecoverable taxes

Expensed Removing old machine Machine supplies Storage costs Repair charges Motor vehicle registration Interest on loan Current portion of insurance premium Cost of replacing damaged part during installation

ACQUISITION OF PROPERTY 1. Acquisition on a cash basis a. Cost: Cash price equivalent (at the recognition date); cash paid plus directly attributable costs, i.e. freight, installation, etc. b. “Basket price” or “lump sum price” – apportion the single price to the assets on the basis of relative fair value 2. Acquisition on account (short-term) a. Cost: Invoice price less discount, whether taken or not 3. Acquisition on installment basis (long-term) Case 1: Cash Price is given a. Cost: Cash price equivalent b. Difference: Discount on Note Payable (dr.) – installment price minus cash price Case 2: No given cash price a. Cost: Present value of all payments (PV of note plus downpayment) using an implied interest rate b. Difference: Discount on Note Payable (dr.) – note payable minus PV of note 4. Issuance of share capital a. Cost: Order of priority 1. Fair value of the property received 2. Fair value of the share capital 3. Par value or stated value of the share capital b. Difference: Share Premium (cr.) – fair value minus par value 5. Issuance of bonds payable a. Cost: Order of priority 1. Fair value of the bonds payable

2. Fair value of the asset received 3. Face amount of the bonds payable b. Difference: Premium (discount) on bonds payable – fair value minus face amount 6. Exchange Case 1: Exchange with commercial substance – no cash involved a. Cost: Order of priority 1. Fair value of the asset given 2. Fair value of the asset received 3. Carrying amount of the asset given b. Difference: Gain/loss on exchange – fair value of asset given minus carrying amount of asset given Case 2: Exchange with commercial substance – cash is involved a. Cost: Fair value of the asset received  Payor: Fair value of asset given plus cash payment  Recipient: Fair value of asset given minus cash received b. Difference: Gain/loss on exchange – fair value of asset given minus carrying amount of asset given Case 3: Exchange with no commercial substance a. Cost: Carrying amount of the asset given  Payor: Carrying amount of asset given plus cash payment  Recipient: Car...