PAGE1

FI
NANCI
ALACCOUNTI
NGANDREPORTI
NG

I
NVENTORI
ES

KeyTer
msandDef
ini
ti
ons

 I
nvent
ori
esar
easset
s:

(
a)Hel
dforsal
eint
heor
dinar
ycour
seofbusi
ness;
(
b)I
nthepr
ocessofpr
oduct
ionf
orsuchsal
e;or
(
c)I
ntheform ofmater
ial
sorsuppl
i
est
obeconsumedi
nthepr
oduct
ionpr
ocessori
nthe
r
ender
ingofserv
ices.

 Netr
eali
zabl
evalueistheesti
matedsel
li
ngpri
ceintheordi
narycour
seofbusi
nessless
t
heesti
matedcostsofcomplet
ionandt
heest
imatedcost
snecessar
ytomakethesal
e.

 Fai
rval
ueistheamountforwhichanassetcouldbeexchanged,oral
i
abi
l
ityset
tl
ed,
bet
weenknowl
edgeabl
e,wi
l
li
ngpart
iesi
nanar
m’slengt
htr
ansacti
on.

CostofI
nvent
ori
es

 Costsofpurchase
 Costsofconversi
on
 Othercost
sincurr
edinbr
ingi
ngt
hei
nvent
ori
est
othei
rpr
esentl
ocat
ionandcondi
ti
on.

Cost
sofPur
chase

 Thecostsofpur chaseofinvent
ori
escompr i
sethepurchasepri
ce,importduti
esandot
her
nonrecov er
abl
et axesandt r
ansport
,handl
ingandothercostsdirect
lyattr
ibut
abl
etothe
acquisi
ti
onoffinishedgoods,materi
alsandservi
ces.Tradediscounts,r
ebatesandot
her
si
milarit
emsarededuct edindeter
miningt
hecostsofpurchase.

Cost
sofConv
ersi
on

 Directlabor
 Var i
ableproduct
ionover
headisal
locat
edtoeachuni
tusi
ngtheact ualuseofpr
oduct
ion
facil
it
ies.
 Fixpr oducti
on over
head al
l
ocat
ed usi
ng t
he nor
maloperat
ing capacit
yofproduct
ion
facil
it
ies.

Ot
herCost
s

 Othercostsareincludedinthecostofi nvent
ori
esonlyt
otheextentt
hattheyareincur
red
i
nbr i
ngingtheinventori
estotheirpresentlocat
ionandcondi
ti
on.Forexample,itmaybe
appropri
atetoincludenon-producti
onov erheadsorthecost
sofdesi gni
ngproductsfor
specif
iccust
omer sinthecostofinventori
es.

I
nvent
orycostshoul
dexcl
ude:
 Abnor mal waste
 Storagecost s
 Admi nist
rati
veov er
headsunrel
atedtoproducti
on
 Selli
ngcost s
 Foreignexchangedi f
fer
encesarisi
ngdi r
ectl
yontherecentacqui
sit
ionofi
nvent
ori
es
i
nv oi
cedi naforeigncurr
ency
 I
nterestcostwheni nventor
iesar
epur chasedwit
hdef
err
edsett
lementter
ms.

10/
26
 PAGE1
CostFor
mul
as

 Thecostofi nv
entori
esofitemst hatarenotordinar
il
yinter
changeabl
eandgoodsor
ser
vicesproducedandsegregatedforspeci
fi
cpr
ojectsshal
lbeassignedbyusi
ngspeci
fi
c
i
dentif
icat
ionofthei
rindi
vi
dualcost
s.
 Thecostofi nvent
ori
es,otherthant hoset hatarenotordi
nari
lyinter
changeable,shal
lbe
assi
gnedbyusi ngthefi
rst-
in,f
irst
-out( FIFO)orweight
edaveragecostf ormul
a.Anent it
y
shal
luset hesamecostf ormulaforal linventori
eshav
ingasimilarnatureanduset othe
enti
ty. Forinvent
ori
eswi thadi fferentnat ureoruse,di
ffer
entcostf or
mulasmaybe
j
usti
fied.

FI
FOPer
pet
ual
andPer
iodi
cIl
l
ust
rat
ed

Units Uni
tCost Total
Cost
Jan.1 Beginni
ngbalance 8,000 70.
00 560,
000
6 Purchase 3,000 81.
00 243,
000
Feb.5 Sal
e 10,000
Mar.5 Purchase 11,000 73.
50 808,
500
Mar.8 Purchaseret
urn 800 73.
50 58,
800
Apr.10 Sal
e 7,000
Apr.30 Sal
er et
urn 300

 I
fper iodi
cFIFO isused,theendinginventor
ywi l
lbeunitcostfrom theMarch8
purchaseandwillbedeductedfrom t
heaccumulati
onofthebeginni
nginvent
oryand
netpurchase,
knownast hetot
algoodsav
ailabl
eforsal
e.

Beginni
ngbalance(8,000x70) 560,
000
Feb.5Purchase(3,000x81) 243,
000
Mar.5NetPur chase(10,200x73.
50) 749,
700
Totalgoodsavail
ableforsale 1,
552,
700
Less:EndingI
nventory*(4,
500x73.50) 330,
750
Costofgoodssol d 1,
221,
950

*
Endi
ngi
nvent
oryi
nuni
ts(
21,
200–16,
700) 4,
500

 COGScomput
ati
onunderper
pet
ual

Feb.5Cost
sofgoodssol
d:

Jan.1Inv
ent
ory(
8,000x70) 560,
000
Jan.6Inv
ent
ory(
2,000x81) 162,
000
Total 722,
000

Apr
il10NetCost
sofgoodssol
d:

Jan.6I
nventory(1,000x81) 81,
000
Mar.5Inventory(5,700x73.
50) 418,
950
Total 499,
950

Jan.1I nv
entory 560,000
6Purchase 243,000
Total 803,000
Feb.5COGS (
722,000)
Balance 81,000
Mar .5NetPur chase 749,700
Total 830,700
Apr.10NetCOGS (
499,950)
Apr.30Inventorybal
ance 330,750

10/
26
 PAGE1
 Per
iodi
cAv
erageorWei
ght
edAv
erage

Beginni
ngbalance(8,000x70) 560,
000
Feb.5Purchase(3,000x81) 243,
000
Mar.5NetPur chase(10,200x73.
50) 749,
700
Totalgoodsavail
ableforsale 1,
552,
700
Less:EndingI
nventory*(4,
500x73.24*
*) 329,
580
Costofgoodssol d 1,
223,
120

Total
cost 1,
552,
700
Div
idebytot
alnumberofunit
s 21,
200
**
Weightedaver
agecostperuni
t 73.
24

 Per
pet
ual
Aver
ageorMov
ingAv
erage

Jan.1I nv
entory 560,000
6Purchase 243,000
Total 803,000
Feb.5COGS( 10,000x73.00*
**) (
730,000)
Balance 73,000
Mar .5NetPur chase 749,700
Total 822,700
Apr.10NetCOGS( 6,
700*73.46**
**) (
492,182)
Apr.30Inventorybal
ance 330,518

*
**Feb5.Aver
agecost(803,
000/11,
000) 73.
00
*
***Apr
il10Aver
agecost(822,
700/11,
200) 73.
46

Measur
ementofI
nvent
ori
es
 Invent
ori
esarer equi
redtobestatedatthelowerofcostandnetr eal
izablev
alue(
NRV).
Invent
ori
es are usual
lywrit
ten down t
o netreal
izabl
evalue i
tem byi t
em. In some
cir
cumstances,however,
itmaybeappropri
atet
ogroupsimi
larorrel
ateditems.

EXAMPLE:

Cost NRV LCNRV

Pr
oductA 200,
000 180,
000 180,
000
Pr
oductB 300,
000 250,
000 250,
000
Pr
oductC 100,
000 130,
000 100,
000
Tot
al 600,
000 560,
000 530,
000
 Thetot
alcarr
yingamountofi
nvent
ori
esshal
lbe530,
000,whi
chi
sthemostconser
vat
ive
amountbyapplyi
ngt
heLCNRVapproach.

Wr
it
e-Downt
oNetReal
i
zabl
eVal
ue

 Iftheendinginv entoryisrecordedoutrightat530,
000,thewrit
edownshal lbei
mmediately
recognizedincostofgoodssol d.Thisi sthedir
ectorcostofsalesmet hod.
 Iftheendi ngi nventoryisrecordedf i
rstatt hecostof600,000,al ossof70, 000wit
ha
corresponding cr editto an al l
owance accountshal lbe r ecognized. Thisi sthe
l
oss/ all
owancemet hod.
 Anywr i
te-
downt oNRVshoul dber ecognizedasanexpenseint heperiodinwhichthewr
ite-
downoccur s.
 Anyr eversalshoul dber ecognizedi nt heincomest at
ementi nt heper i
odinwhichthe
reversaloccurs.

Recogni
ti
onasanExpense
 Wheni
nvent
ori
esar
esol
d,t
hecar
ryi
ngamountoft
hosei
nvent
ori
esshal
lber
ecogni
zedas

10/
26
 PAGE1
anexpensei ntheper i
odinwhi cht her el
at edrevenueisrecognized.
 Theamountofanywr i
te-
downofi nvent or
iest onetr eali
zablevalueandal ll ossesof
i
nv entori
esshal l
ber ecogni
zedasanexpensei ntheperiodthewr it
e-downorl ossoccur s.
 Theamountofanyr ever
salofanywr ite-
downofi nv
entori
es,arisi
ngfrom ani ncreaseinnet
reali
zablev al
ue,shallberecogni zedasar educti
oni nt
heamountofi nv entoriesr ecogni
zed
asanexpensei nt heperi
odi nwhi cht her eversaloccur
s.
 Somei nventor
iesmaybeal l
ocat edtoot herassetaccount s,forexampl e,i
nv entor yusedas
acomponentofsel f-
constructedpr oper ty,plantorequi pment .Inv entoriesal locatedto
anotherasseti nthiswayar erecogni zedasanexpensedur i
ngtheusef ulli
feoft hatasset.

Requi
reddi
scl
osur
es:

 Account
ingpol
i
cyf
ori
nvent
ori
es.

 Car
ryi
ng amount
,gener
all
ycl
assi
fi
ed as mer
chandi
se,suppl
i
es,mat
eri
als,wor
kin
progr
ess,andf
ini
shedgoods.Thecl
assi
fi
cat
ionsdependonwhati
sappr
opr
iat
efort
he
enter
pri
se.

 Car
ryi
ngamountofanyi
nvent
ori
escar
ri
edatf
airv
aluel
esscost
stosel
l
.
 Amountofanywr
it
e-downofi
nvent
ori
esr
ecogni
zedasanexpensei
ntheper
iod.
 Amountofanyr
ever
salofawr
it
edownt
oNRVandt
heci
rcumst
ancest
hatl
edt
osuch
r
ever
sal
.
 Car
ryi
ngamountofi
nvent
ori
espl
edgedassecur
it
yforl
i
abi
l
iti
es.
 Costofi
nvent
ori
esr
ecogni
zedasexpense(
costofgoodssol
d).

I
nvent
oryEst
imat
ionTechni
ques

 GrossMethod–Basedont heassumptiont
hatthegrossprofi
tappl
iedbyanenti
tyt
oits
product
sr emai
ns appr
oximatel
yt he same f
rom period t
o peri
od and t
her
eforethe
rel
ati
onshi
pbetweencostofgoodssoldandsal
esisconstant
.

Goodsav ai
lableforsale X
Less:Esti
mat edcostofgoodssol
d
Netsales* X
Less:Grossprofi
t X X
Esti
mat edendinginventor
y X

Thecostofgoodssoldcanalsobecomput
edifthenetsalei
smult
ipl
i
edby1lesstheGP
rat
eift
hegrossprof
itr
atebasedonsal
esornetsal
esdi
videdby1pl
usthegr
osspr
ofitr
ate
i
fthegrosspr
ofi
trat
eisbasedoncost.

*Netsalesshal
lbegrosssal
esl
ess“sal
esret
urnsandallowance”or“
sal
esr
etur
ns”onl
yin
orderf
ortheesti
mateinendi
ngi
nvent
orynott
obeov er
stated.

 Ret
ailMet
hod–Employ
edbyret
ail
ersdeali
ngwi thnumer
ousdi
ff
erenti
temsf
orsal
ewi
th
var
yingmar
kupper
cent
agest
okeeptrackunitcost.

Goodsav ai
l
ableforsaleatret
ail X
Less:Netsales X
Employeediscounts X
Normal l
osses X X
Esti
matedendinginventor
y X
Multi
pli
edbythecostr at
io %
Esti
matedendinginventor
yatcost X

 Conser
vat
iveCostRat
io=GASatcostdi
vi
dedbyGASatr
etai
lbef
orenetmar
kdown
 Av
erageCostRat
io=GASatcostdi
vi
dedbyGASatr
etai
l(af
ternetmar
kdown)
 FI
FOCostRat
io=Pur
chasesatcostdi
vi
dedbyPur
chasesatr
etai
laf
ternetmar
kdown
 Netsal
essimilart
othe“gr
ossprof
itmethod”ofesti
mationiscomputedbyi
gnor
ingt
he
sal
esdiscountandsal
esal
lowanceifi
tissepar
atedfrom sal
esret
urns.

10/
26
 PAGE1

--END--

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26