Professional Documents
Culture Documents
I. Definition – assets 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
presented as one line in the B/S (current assets section); breakdown/details are shown in the notes
Inventory shortage – usually closed to CGS unless abnormal or material, in which case is presented
as other expense
B. Trade discounts
C. Cash discounts
Gross and net method for recording purchases with cash discounts
Excluded from cost of inventories: (a) abnormal waste, (b) storage costs, (c) administrative
overhead, and (d) selling costs
A. FIFO
Inventory in the balance sheet is valued at most recent costs
Ending inventory cost under FIFO periodic and FIFO perpetual is the same
No proper matching in the income statement
B. Weighted average
Inventory cost = total cost of GAS ÷ total units available for sale
Under perpetual, requires computation of a moving average cost
C. Specific Identification
Used for inventories that are segregated for a specific project and inventories that are not
ordinarily interchangeable
Lower of cost or net realizable value on an item by item basis (NRV = estimated selling price in the
ordinary course of business less estimated cost of completion and the estimated cost necessary to
make the sale); similar or related items may be grouped for purposes of applying LCNrv
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* estimated using gross profit rate based on (1) sales or (2) cost
Example:
GPR based on sales GPR based on cost
Net Sales** 100% 140%
CGS 60% 100%
Gross Profit 40% 40%
B. Retail Method1
Basic Formula
(1) Conservative or conventional or LCM approach – considers only net markup (net markup = markup less
markup cancellation) in computing GAS @ retail.
(2) Average cost approach – considers both net markup and net markdown (net markdown = markdown
less markdown cancellation) in computing GAS @ retail
(3) FIFO – similar to average cost but markup and markdown adjustments are applied only to purchases
during the year; the cost ratio is based only on purchases (cost ratio = purchases @ cost ÷ purchases @
retail)
Terminology
a. initial markup – original markup on the cost of goods
b. original retail – the sales price at which the goods are first offered for sale
c. additional markup – increase in sales price above the original sales price
d. markup cancellation – decrease in sales price that does not decrease the sales price below the original
sales price (i.e., cancellation only of additional markup)
e. net additional markup or net markup = markup less markup cancellation
f. markdown – decrease in sales price below the original sales price
g. markdown cancellation – increase in sales price that does not increase the sales price above the original
sales price (i.e., cancellation only of markdown)
h. net markdown – markdown less markdown cancellation
i. maintained markup – difference between cost and sales price after adjustment for all the above items;
a.k.a. “markon”
1
This section is from Valix and Peralta, Financial Accounting Vol. 1
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Treatment of other items
a. purchase discount and purchase allowance – deducted from purchases at cost only
b. purchase return – deducted from purchases at cost and at retail
c. freight in – added to purchases at cost only
d. departmental transfer in or debit – addition to purchases at cost and at retail
e. departmental transfer out or credit – deduction from purchases at cost and at retail
f. sales discount and sales allowance – ignored
g. sales return – deducted from sales
h. employee discounts – added to sales
i. normal shortage, shrinkage, spoilage, breakage – deducted from GAS @ retail
j. abnormal shortage, shrinkage, spoilage, breakage – deducted from GAS @ cost and GAS @ retail
Illustrations
Cost Retail
Beginning inventory 180,000 250,000
Net purchases 1,020,000 1,575,000
Additional markup 200,000
Markup cancellation 25,000
Markdown 140,000
Markdown cancellation 15,000
Sales 1,450,000
Sales return 50,000
Sales allowance 10,000
Sales discount 20,000
Employee discount 40,000
Spoilage and breakage 35,000
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EI at average cost 256,000
FIFO Approach
Cost Retail
Beginning inventory 180,000 250,000
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Attachment A
Lower of Cost or Net Realizable Value
Illustration:
Assume the inventory records show the following data on December 31, 2014
Unit Total Total
Units cost NRV cost NRV LCNrv
[a] [b] [c] [a] x [b] [a] x [c]
Product X 1000 11 10 11000 10000 10000
Product Y 3000 23 25 69000 75000 69000
Product Z 2000 30 32 60000 64000 60000
140000 149000 139000
In accordance with Phil. GAAP, the inventory must be measured at lower of cost or net realizable value on
an item-by-item basis (or by grouping similar items). In this case, the Dec 31, 2014 balance sheet should
report inventories at P139,000.
Direct Method
A. Periodic system
Inventory 139,000
Income summary 139,000
B. Perpetual system
Allowance Method
A. Periodic system
Inventory 140,000
Income summary 140,000
B. Perpetual system
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Thus, under direct method, inventory in the B/S is valued at P139,000.
Under the allowance method, inventory is shown as follows:
Inventory at cost P140,000
Less: Allowance for decline in value of inventory 1,000
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P139,000
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Direct Method
A. Periodic system
Inventory 96,000
Income summary 96,000
B. Perpetual system
Allowance Method
A. Periodic system
Inventory 100,000
Income summary 100,000
** because the allowance account has an existing balance of P1,000. Thus, we need to increase it
only by P3,000
B. Perpetual system
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Thus, under direct method, inventory in the B/S is valued at P96,000.
Under the allowance method, inventory is shown as follows:
Inventory at cost P100,000
Less: Allowance for decline in value of inventory 4,000
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P 96,000
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Computation of Cost of Goods Sold for 2015
Direct Method
A. Periodic
B. Perpetual
Allowance Method
A. Periodic
B. Perpetual
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CGS before LCNrv adjustment P260,000
Add: Loss on writedown of inventory 3,000
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Adjusted CGS P263,000
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Source:
Notes from Prof. Florendo