Lesson 3
PAS 2
INVENTORIES
MIKKAELLA ANN BLANKAS, CPA, MBA, CLSSYB
01 Definition of Inventories
02 Presentation of Inventories
03 Measurement of Inventories
04 Cost Formula
Accounting for Inventory Write-down
05 and Reversal
INVENTORIES
a. Held for sale in the ordinary course of business (Finished Goods)
b. In the process of production for such sale (Work In Process)
c. In the form of materials or supplies to be consumed in the
production process or in the rendering of services (Raw
Materials and Manufacturing Supplies)
FINANCIAL STATEMENT PRESENTATION
As one line item under the caption “Inventories”
The breakdown of the “inventories” (as finished goods, work in
process and raw materials) is disclosed in the notes.
Normally presented in statement of financial position as
current assets.
MEASUREMENT OF INVENTORY
Measured at the lower of cost and net realizable value (LCNRV)
Costs of purchase
Estimated selling price in the
+ Costs of conversion
ordinary course of business
+ other costs incurred in bringing
- Estimated costs of completion
the inventories to their present
- Estimated costs to sell
location and condition
= Net realizable value (NRV)
= Cost of inventories
COSTS THAT ARE EXPENSED WHEN INCURRED
1. Abnormal amounts of wasted materials, labor and
other production costs
2. Selling costs (advertising and promotion, delivery
expense, freight out)
3. Administrative overheads
4. Storage costs (unless necessary in the production
process before further production stage)
COST FORMULA
Specific identification – cost of sales is the cost of the specific
inventory that was sold
First In, First Out (FIFO) – cost of sales is based on the cost of
inventories that were purchased first.
Weighted Average Cost – cost of sales is based on the average
cost of all inventories purchased during the period
INVENTORY WRITE DOWNS AND
REVERSALS OF WRITE DOWNS
Inventories are usually written down to net realizable value on an
item-by-item basis.
If cost of inventory > NRV, then the inventory is written down to
NRV. The excess of cost over NRV = amount of write down
The amount of reversal should not exceed the amount of the
original write down previously recognized
RECOGNITION OF INVENTORY AS AN EXPENSE
The carrying amount of an inventory that is sold is charged as
expense (cost of sales) in the period in which the related
revenue is recognized.
The write down of inventories to NRV and all losses of
inventories are recognized as expense in the period the write
down or loss occurs.
THANK YOU!!!
