PAS 2: INVENTORIES

Learning Objectives
• Define inventories.
• Measure inventories and apply the cost
formulas.
• State the accounting for inventory
write-down and the reversal thereof.
JM
 PAS 2: INVENTORIES

Inventories are assets:

a. Held for sale in the ordinary course of business
(Finished Goods);
b. In the process of production for such sale (Work
In Process); or
c. In the form of materials or supplies to be
consumed in the production process or in the
rendering of services (Raw materials and JM
 PAS 2: INVENTORIES

Financial statement presentation

All items that meet the definition of inventory are
presented on the statement of financial position as
one line item under the caption “Inventories.” The
breakdown of this line item (as finished goods, WIP
and Raw materials) is disclosed in the notes.
Inventories are normally presented in a classified
statement of financial position as current assets.
JM
 PAS 2: INVENTORIES

Measurement
Inventories are measured at the lower of cost and net realizable
value (NRV).

The cost of inventories comprise all costs of purchase, costs of

conversion and other costs incurred in bringing the inventories to
their present location and condition.
Net realizable value (NRV) 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
JM sale.
 PAS 2: INVENTORIES
Costs that are EXPENSED
when incurred

1. Abnormal amounts of wasted materials, labor or

other production costs.
2. Selling costs, for example, advertising and
promotion costs and delivery expense or freight
out.
JM
 PAS 2: INVENTORIES

Costs that are EXPENSED when incurred

3. Administrative overheads that do not contribute to

bringing inventories to their present location and condition.
4. Storage costs, unless those costs are necessary in the
production process before a further production stage, (e.g.,
the storage costs of partly finished goods may be capitalized
as cost of inventory, but the storage costs of completed
finished goods are expensed).
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 PAS 2: INVENTORIES
Cost Formulas
1.Specific identification - shall be used for
inventories that are not ordinarily
interchangeable (i.e., used for inventories that
are unique). Cost of sales is the cost of the
specific inventory that was sold.

JM
 PAS 2: INVENTORIES
Cost Formulas
2. FIFO – cost of sales is based on the cost of
inventories that were purchased first.
Consequently, ending inventory represents the
cost of the latest purchases.

JM
 PAS 2: INVENTORIES
Date Transaction Units Unit Cost Total Cost
Jan 1 Beginning 100 10 1,000
Inventory
Jan 7 Purchase 300 12 3,600
Jan 12 Sale 320
Jan 21 Purchase 200 14 2,800

JM
 PAS 2: INVENTORIES
Cost Formulas
3. Weighted Average Cost – cost of sales is based
on the average cost of all inventories purchased
during the period.
 Wtd. Ave. Cost = (TGAS in pesos ÷ TGAS in
units)

JM
 PAS 2: INVENTORIES

Write down of inventories

Inventories are usually written down to net
realizable value on an item by item basis.
If the cost of an inventory exceeds its NRV, the
inventory is written down to NRV, the lower
amount. The excess of cost over NRV represents
the amount of write-down.
JM
 PAS 2: INVENTORIES

Reversal of write-downs
The amount of reversal to be
recognized should not exceed the
amount of the original write-down
previously recognized.

JM
 PAS 2: INVENTORIES

Recognition as an expense
The carrying amount of an inventory that is sold
is charged as expense (i.e., cost of sales) in the
period in which the related revenue is
recognized. Likewise, the write-down of
inventories to NRV and all losses of inventories
are recognized as expense in the period the
write-down or loss occurs. JM
PAS 2: INVENTORIES

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JM