INVENTORIES
INVENTORIES
INVENTORIES
Answer: 5,979,000
INVENTORY ACCOUNTING SYSTEM Initial Measurement:
Solution:
Weighted average periodic method
The cost of the beginning inventory plus the total cost of
purchases during the period is divided by the total units purchased
plus those in the beginning inventory to get a weighted average unit
cost. Such weighted average unit cost is then multiplied by the units
on hand to derive the inventory value. In other words, the average
unit cost is computed by dividing the total cost of goods available
for sale by the total number of units available for sale.
Journal entries on the part of Ash to compute for net remittance (if Specific Identification
payment is made on June 11, 2018): Periodic system (Perpetual Specific identification means that specific costs are
system) attributed to identified items of inventory.
The cost of the inventory is determined by simply
multiplying the units on hand by their actual unit cost.
This requires records which will clearly determine the
actual costs of goods on hand.
PAS 2, paragraph 23, provides that this method is
appropriate for inventories that are segregated for a specific project
and inventories that are not ordinarily interchangeable.
The specific identification method may be used in either
periodic or perpetual inventory systems.
The major argument for this method is that the flow of the
inventory cost corresponds with the actual physical flow of goods.
With specific identification, there is an actual
determination of cost of units sold and on hand. The major
argument against this method is that it is very costly to implement
even with high-speed computers.
Information Required:
a. Beginning inventory at cost and retail price
b. Purchases during the period at cost and at a retail price
c. Adjustments to the original retail price such as additional
markup, markup cancelation, markdown, and markdown
cancelation
d. Other adjustments such as departmental transfer,
breakage, shrinkage, theft, damaged goods, and employee
discount
INVENTORY:
Measurement of Inventories Initial-Subsequent Recognition
Direct method:
The beginning and ending inventory are reported directly
at the lower of cost and net realizable value; hence, the decline in
net realizable value is absorbed by the cost of goods sold.
Allowance Method:
Both the beginning and ending inventories are measured
at cost in the computation of the cost of goods sold. The adjustment
in the balance of the allowance is presented as other income
(recovery) or other operating expenses (decline) in profit or loss.
The adjustment can also be closed to COGS. Presentation would
depend on the policy of the entity. If they are not closed to COGS,
presentation would look like this:
Illustrative Example 3: Direct Method and Allowance Method ● Accordingly, agricultural crops that have been harvested
(Perpetual Inventory System) or mineral products that have been extracted are measured
Assume the following data for Song Joong Ki (SJK) at net realizable value:
company. The company uses Perpetual Inventory System ● When a sale is assured under a forward contract or
government guarantee
● When a homogenous market exists and there is a
negligible risk failure to sell
Commodities of broker-traders
● PAS 2, paragraph 3, provides that commodities of
Journal Entries: broker-traders are measured at fair value less cost of
disposal.
● PFRS 13, paragraph 9, fair value = price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants.
● Broker traders = buy and sell commodities for others or on
their own account
Purchase Commitments
● Purchase Commitments are obligations of the entity to
acquire certain goods sometime in the future at a fixed
price and fixed quantity.
● Actually, a purchase contract has already been made for
future delivery of goods fixed in price and in quantity.
● Where the purchase commitments are significant or
unusual, disclosure is required in the accompanying notes
to financial statements.
● Any losses which are expected to arise from firm and non
cancelable commitments shall be recognized.
● If there is a decline in purchase price after a purchase
commitment has been made, a loss is recorded in the
period of the price decline.
● Note that a purchase commitment must be noncancelable
in order that a loss purchase commitment can be
recognized.
● Thus, if at the end of the reporting period, the purchase
price falls below the agreed price the difference is
accounted for as a debit to loss on purchase commitments
and a credit to an estimated liability.
● The loss on purchase commitment is classified as other
expense and the estimated liability for purchase
commitment is classified as current liability.