Inventories

• Inventories

  Assets:

  (a) held for sale in the ordinary course of business;

  (b) in the process of production for such sale; or

  (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
• "People don't buy because what you do is awesome. People buy because it makes them feel awesome."- Tara Gentile
• This chapter deals with the nature, recognition, measurement presentation and disclosures of inventories in accordance with PAS 2 - Inventories; and PIC Q&A 2018-10- Scope of disclosure of inventory write-downs.
• Other issues related to inventories are also discussed. Techniques used to estimate inventories are included in the next chapter.
• Items Included in Inventories

  • Merchandise purchased by a retailer and held for resale
  • Land and other property of a real estate entity held for resale
  • Finished goods produced by the entity
  • Work in progress being produced by the entity
  • Materials and supplies awaiting use in the production process
• Control of an asset

  The ability to direct the use of and obtain substantially all of the remaining economic benefits from the assets and the ability to prevent others from doing the same
• In most cases, 'owned include, not owned exclude'.
• Free On Board (FOB) shipping point

  Owned by the buyer since title of ownership transfers upon the goods leaving the seller's location
• FOB destination


  Owned by the seller since title of ownership transfers when the goods reach the buyer's location
• Goods on Consignment


  Owned by the consignor (principal) since it has control over the goods and not the consignee (agent)
• Goods Used as Collateral


  Owned by the borrower not the lender
• The carrying amount of goods used as collateral should be disclosed.
• The goods are excluded from the seller's inventory if the transaction qualifies for recognition as revenue. In accordance with PFRS 15, revenue is recognized as control over the goods is passed.
• Typical transactions related to inventories and their effect include: Purchases, Purchase returns, Received from consignors, Transferred to consignees, Sales, Sales - received from consignors, Sales consignees, Sales returns in good condition, Sales returns-unsalable
• Differences between Periodic and Perpetual Inventory Systems


  • Record keeping
  • Entities using the system
  • Recording of purchases on account
  • Recording of purchase returns (received credit memo from supplier)
  • Recording of cost of sales
  • Cost of sales computation
  • Recording of cost of sales returns in good condition
  • Physical count
• Recognition of inventories is not specified in PAS 2. An entity applies the general recognition criteria for the elements of financial statements.
• Measurement of Inventories


  Inventories are required to be measured at the lower of cost and net realizable value (NRV)
• Items Included in Cost

  • Costs of Purchase
  • Costs of Conversion
  • Other Costs
• Examples of costs excluded from the cost of inventories and recognized as expenses in the period in which they are incurred: Unallocated overheads, Abnormal amounts of wasted materials, labor or other production costs, Storage costs, Administrative overheads that do not contribute to bringing inventories to their present location and condition, Selling costs, Foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency
• For inventories purchased with deferred settlement terms, the difference between the purchase price for normal credit terms and the amount paid is recognized as interest expense over the period of financing.
• The following are recognized as expense in the period in which they occur: The carrying amount of inventories when inventories are sold, The amount of any write-down of inventories to NRV, All losses of inventories
• Inventories allocated to other asset accounts, for example, inventory used as a component of self-constructed property, plant and equipment are recognized as an expense during the useful life of that asset.
• A primary issue in accounting for inventories is the amount of cost to be recognized as an asset and carried forward until the related revenues are recognized.
• To emphasize this issue, assume an entity has 10 units of inventory at the beginning of the period, purchases 20 units during the period, and sells 15 units during the period.
• Inventories invoiced in a foreign currency

  The difference between the purchase price for normal credit terms and the amount paid is recognized as interest expense over the period of financing
• Recognition as expense


  1. The carrying amount of inventories when inventories are sold

  2. The amount of any write-down of inventories to NRV

  3. All losses of inventories

  4. Inventories allocated to other asset accounts are recognized as an expense during the useful life of that asset
• Cost formulas


  The amount of cost to be recognized as an asset and carried forward until the related revenues are recognized
• Cost formulas


  • Specific identification
  • First-in, first-out (FIFO)
  • Weighted average
• Specific identification


  Specific costs are attributed to identified inventory
• FIFO


  The items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced
• Weighted average


  The cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period
• Computation of the cost of ending inventory using specific identification: Units on hand x Specific unit cost
• Computation of the cost of ending inventory using FIFO: Units on hand x Unit cost of latest purchases
• Computation of the cost of ending inventory using weighted average: Units on hand x Weighted Average Unit Cost (WAUC)
• WAUC = Total cost of goods available for sale / Total units available for sale
• When a firm increases advertising, their demand curve shifts right, increasing the equilibrium price and quantity
• Marginal utility


  The additional utility (satisfaction) gained from the consumption of an additional product
• Total utility is the sum of marginal utility for each unit
• Net realizable value (NRV)

  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 refers to the net amount that an entity expects to realize from the sale of inventory in the ordinary course of business