Chapter 16 Inventories

Inventories
GENE MATTHEW CO
MBA 602-1
TO UNDERSTAND THE TO IDENTIFY THE MAJOR TO ACCOUNT FOR INVENTORY
MEANING OF INVENTORIES. CLASSES OF INVENTORY. TRANSACTIONS USING
PERIODIC AND PERPETUAL
INVENTORY SYSTEM.
Objectives
TO KNOW THE GROSS TO IDENTIFY THE ITEMS TO UNDERSTAND THE

METHOD AND NET METHOD OF INCLUDED IN INVENTORY INVENTORY OF A SERVICE
RECORDING PURCHASES. COST. PROVIDER.
Assets held for sale
Goods held for re-sale
Inventory It can also be any of the following:
• Goods in process
• Materials and suppliers
• Finished goods
Classes of Trading Concern Manufacturing Concern
Inventory
Finished goods
Goods in process
Raw Materials
Factory or manufacturing
supplies
Goods
included in • “Passing of title” is a legal language which means “the
point of time at which ownership changes.”
the inventory
Legal Test • “Is the entity the owner of the goods to be inventoried?”
Exception to “Goods sold on installment are included in the inventory of
the Legal the buyer and excluded from that of the seller, the legal test to
the contrary notwithstanding.”
Test
Who is the owner of
goods in transit
• FOB means free on board
• FOB Destination
• Ownership of goods transferred only upon
receipt by the buyer at the point destination.
• FOB Shipping
• Ownership of goods is transferred upon
shipment of goods.
Freight Terms
• Freight Collect – Freight charge on the goods are
not yet paid. The common carrier shall collect the
same from the buyer. Freight is actually paid by
the buyer.
• Freight Prepaid – The freight charge on the goods
is already paid by the seller.
Maritime Shipping
Terms
• FAS ( Free Alongside ) – A seller who ships FAS
must bear all expenses and risk involved in
delivering the goods to the dock next to or
alongside the vessel on which the goods are to be
shipped
• CIF (Cost, Insurance and Freight) – The buyer
agrees to pay in a lump sum the cost of the
goods, insurance cost and freight charge
• EX-SHIP – Seller bears all expenses and risk of
loss until the goods are unloaded at which time
and risk of loss shall pass to the buyer.
Consigned Goods
• It is a method of marketing goods in which the owner called the
consignor transfer physical possession of certain goods to an
agent called the consignee who sells them on the owner’s behalf.
• For example, a consignee sells consigned goods for P100,000.

The amount is remitted to the consignor less commission of
P15,000 and advertising of P2,000.
• The consignor simply records the cash remittance as follows:

Cash 83,000
Commission 15,000
Advertising 2,000
Sales 100,000
• Classified as assets
• Inventories should be presented as
Statement of one line item in the statement of
Presentation financial position, but the details of
the inventories shall be disclosed in
the notes of financial statements.
Periodic System
Accounting
for
Inventories
Perpetual System
Illustration
The inventory shortage is usually closed
to cost of goods sold because this is
often the result of normal shrinkage and
breakage in inventory
Inventory
shortage
However, abnormal and material shortage
shall be separately classified and
presented as other expense.
Trade Discounts - deductions from the list or
catalog price in order to arrive at the invoice
price which is the amount actually charged to
the buyer. These are not recorded
Trade and Cash
Discounts
Cash Discounts are deductions from the
invoice price when payment is made within
the discount period. These are Recorded
Illustration:
The list price of a merchandise purchased is P500,000 less 20% and 10%, with
credit terms of 5/10, n/30.
List Price 500,000

First Trade Discount (20% x 500,000) 100,000)
400,000
Second Trade Discount (10% x 400,000) (40,000)
Invoice Price 360,000
Cash Discount (10% x 360,000) (18,000)
Payment within discount period 342,000
The journal entry to record the purchase is :
Purchases 360,000
Accounts Payable 360,000
The journal entry to record the payment of the invoice:

Cash 342,000
Purchase Discounts 18,000
Methods of
Recording
Purchases GROSS METHOD NET METHOD
Illustration
Net Method:
Gross Method:
1. Purchases on account, PHP 200,000 2/10, n/30
1. Purchases on account, PHP 200,000 2/10, n/30 Purchases 196,000
Accounts payable 196,000
Purchases 200,000 2. Assume payment is made within the discount period.
Accounts payable 200,000 Accounts payable 196,000
2. Assume payment is made within the discount period. Cash 196,000
3. Assume payment is made beyond the discount period.
Accounts payable 200,000 Accounts payable 196,000
Cash 196,000 Purchase discount lost (other expense) 4,000
Purchase discount 4,000 Cash 200,000
3. Assume payment is made beyond the discount period. 4. Assume it is the end of accounting period, no payment is made and the
discount has expired
Accounts payable 200,000
Purchase discount lost (other expense) 4,000
Cash 200,000
Cost of Purchase
Cost of Cost of Conversion

Inventories
Other costs incurred in bringing

the inventories to their present
location and condition
Consists primarily of the labor
and other costs
Cost of
inventories May be simply described as
of a service work in progress
provider
Labor and other cost relating to
sales and general administrative
personnel are not included
Thank you!

Chapter 16 Inventories

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Inventories

TO KNOW THE GROSS TO IDENTIFY THE ITEMS TO UNDERSTAND THE

Goods held for re-sale

Inventory It can also be any of the following:

• For example, a consignee sells consigned goods for P100,000.

• The consignor simply records the cash remittance as follows:

List Price 500,000

The journal entry to record the payment of the invoice:

Cost of Cost of Conversion

Other costs incurred in bringing

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