INVENTORIES

• Inventories


  Assets which are: held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process, or in the rendering of services
• Classes of inventories


  • Merchandise Inventory (Trading/Merchandising concern)
  • Finished goods inventory (Manufacturing concern)
  • Work in process (goods in process) inventory (Manufacturing concern)
  • Raw materials inventory (Manufacturing concern)
  • Factory (or manufacturing) supplies inventory (Manufacturing concern)
• Goods to be included in the inventory

  • All goods to which the entity has title shall be included in the inventory, regardless of location
  • Passing of title - the point of time at which ownership changes
  • Legal test: If the entity is the owner of the goods to be inventoried, then the goods shall be included in the inventory
• Goods included in inventory (applying the legal test)


  • Goods owned and on hand
  • Goods in transit and SOLD FOB Destination
  • Goods in transit and PURCHASED FOB Shipping point
  • Goods OUT on consignment
  • Goods in the hands of salesmen or agents
  • Goods held by customers on approval or on trial
• Exception to the legal test

  Goods sold on installment - Included in the inventory of the BUYER and excluded from that of the seller
• FOB (Free On Board or Freight On Board)


  • Determines ownership of goods in transit and the party who should pay the freight charge from the point of shipment to the point of destination
  • Determines the party who will bear losses
• FOB destination vs FOB shipping point

  • Freight collect
  • Freight prepaid
• Freight collect


  Freight charge is not yet paid; Common carrier collects from the buyer
• Freight prepaid


  Freight is already paid by the seller
• FOB destination


  Ownership is transferred upon Receipt of the goods by the buyer at the point of destination
• FOB shipping point


  Goods in transit are the property of the Seller
• FOB destination


  Seller is legally responsible to pay for freight charges
• FOB shipping point


  Buyer is ACTUALLY paid by the buyer
• FAS or free alongside


  The seller bears all expenses and risk involved in delivering the goods to the dock next to or alongside the carrier or vessel on which the goods are to be shipped. The buyer bears the cost of loading and shipment. Title passes to the buyer when the carrier takes possession of the goods.
• CIF or Cost, insurance and freight

  The buyer agrees to pay in a lump sum the cost of the goods, insurance cost and freight charge. The seller must deliver the goods to the carrier and pay the costs of loading. Title and risk of loss pass to the buyer upon delivery of the goods to the carrier.
• Ex-ship


  The seller assumes all expenses until the goods are unloaded from the carrier, at which time title passes to the buyer.
• Illustration: Goods in transit

  • Montevideo Co. purchased goods with invoice price of P100,000 on account on December 27, 2019. The related shipping costs amounted to P1,000. The seller shipped the goods on December 30, 2019. Montevideo received the goods on January 3, 2020 and settled the account on January 6, 2020.
• Entries in the books of Montevideo under the different terms

  • FOB shipping point, freight collect
  • FOB destination, freight prepaid
  • FOB shipping point, freight prepaid
  • FOB destination, freight collect
• Consignment


  A method of marketing goods in which the consignor (the owner) transfers physical possession of certain goods to consignee (an agent) who sells them on the owner's behalf.
• Consigned goods


  Included in the inventory of CONSIGNOR and excluded from the CONSIGNEE's inventory
• Freight and other handling charges on goods OUT on consignment


  Part of the cost of goods consigned
• Repair costs for damages during shipment and storage and other maintenance costs

  Charged to expenses
• Commissions


  Do not affect the cost of consigned goods
• Statement presentation of consigned goods

  • As one line item under the CURRENT ASSETS
  • In Manufacturing concern, the classification or details of inventories shall be disclosed in the Notes to FS
• Two Accounting Systems for Inventories

  • Periodic system
  • Perpetual System
• Cost of inventories include

  • Cost of purchase (Purchase price, import duties, freight, handling)
  • Cost of conversion (Direct labor, Variable overhead, Fixed overhead allocated based on normal capacity of the production facilities)
  • Other cost incurred in bringing the inventories to their present location and condition (e.g. product design)
• Excluded from cost inventories

  • Abnormal amounts of wasted materials, labor and other production costs
  • Storage costs (finished goods)
  • Administrative costs
  • Distribution or selling costs
• Sale with unusual right of return

  • The buyer recognizes goods purchased under a sale with right of return at the time of sale, unless the goods purchased does not qualify for recognition as asset.
  • The buyer DOES NOT recognize any inventory when (a) He assesses that no economic benefit will be derived from the goods, such as when they are defective or unsalable; (b) The buyer intends to return the goods to the seller within the time limit allowed under the sale agreement.
• Bill and hold arrangement


  A contract of sale under which a seller bills a customer but retains physical possession
• Fixed overhead


  Allocated based on normal capacity of the production facilities
• Other costs incurred in bringing the inventories to their present location and condition


  Excluded from cost of inventories
• Abnormal amounts of wasted materials, labor and other production costs

  Excluded from cost of inventories
• Storage costs (finished goods)

  Excluded from cost of inventories
• Administrative costs


  Excluded from cost of inventories
• Distribution or selling costs

  Excluded from cost of inventories
• Sale with unusual right of return


  The buyer recognizes goods purchased at the time of sale, unless the goods do not qualify for recognition as an asset
• The buyer does not recognize any inventory


  When (a) the buyer assesses that no economic benefit will be derived from the goods, such as when they are defective or unsalable; (b) the buyer intends to return the goods to the seller within the time limit allowed under the sale agreement
• Bill and hold arrangement


  A contract of sale under which a seller bills a customer but retains physical possession of the goods until it is transferred to the customer at a future date. Goods are excluded from the seller's inventory and included in the buyer's inventory upon billing provided: (a) The customer has requested for the arrangement, (b) The goods are identified separately as belonging to the customer, (c) The goods are available for immediate transfer to the customer, (d) The seller cannot use the goods or sell them to another customer.
• Lay away sale


  Goods are delivered only when the buyer makes the final payment in a series of installments. Different from a regular installment sale wherein goods are delivered to the buyer at the time of sale. Included in the seller's inventory until the goods are delivered to the buyer. Delivery is made after the final installment payment is paid.
• Inventory ownership


  • In transit, purchased FOB shipping point - Buyer
  • In transit, sold FOB destination - Seller
  • Consigned goods (out on consignment) - Consignor
  • Held by customers on trial or approval - Seller
  • Product financing arrangement - Seller
  • Pledge of inventory - Borrower
  • Loan on inventory - Borrower
  • Sale with unusual right or return - Buyer EXCEPT when UNSALABLE
  • Bill and hold - Buyer
  • Lay away - Seller