Inventories Flashcards
Accounting Standards:
The relevant accounting standard for inventories under the Philippine Financial Reporting Standards (PFRS) is PAS 2 Inventories.
Scope of the Applicable Standard:
PAS 2 applies to all inventories except:
- Work in progress arising under construction contracts, including directly related service contracts (see PFRS 15 Revenue from Contracts with Customers).
- Financial instruments (see PFRS 9 Financial Instruments).
- Biological assets related to agricultural activity and agricultural produce at the point of harvest (see PAS 41 Agriculture).
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.
Inventories
The estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.
Net Realizable Value (NRV)
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fair Value
Recognition: Initial and Subsequent
- Initial Recognition: Inventories are recognized when the entity has control over them, and it is probable that future economic benefits associated with the inventories will flow to the entity and the cost of the inventories can be measured reliably.
- Subsequent Recognition: Inventories are recognized as an expense in the period in which the related revenue is recognized. If inventories are carried at a value higher than their net realizable value, the inventory amount is written down to net realizable value.
Measurement: Initial and Subsequent
- Initial Measurement: Inventories are measured at cost upon initial recognition. The cost of inventories includes all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.
- Subsequent Measurement: Inventories are measured at the lower of cost and net realizable value (NRV). The cost of inventories may be assigned by using specific identification, first-in, first-out (FIFO), or weighted average cost formula.
Journal Entries:
- Initial Recognition (Purchase of Inventory):
Dr. Inventory XXX Cr. Accounts Payable/Cash XXX
- Sale of Inventory:
```
Dr. Cost of Goods Sold XXX
Cr. Inventory XXX
Dr. Accounts Receivable/Cash XXX
Cr. Sales Revenue XXX
- Write-down to NRV:
Dr. Cost of Goods Sold XXX
Cr. Inventory XXX
```
Journal Entries:
- Initial Recognition (Purchase of Inventory):
Dr. Inventory XXX Cr. Accounts Payable/Cash XXX
- Sale of Inventory:
```
Dr. Cost of Goods Sold XXX
Cr. Inventory XXX
Dr. Accounts Receivable/Cash XXX
Cr. Sales Revenue XXX
- Write-down to NRV:
Dr. Cost of Goods Sold XXX
Cr. Inventory XXX
```
Presentation
Inventories are presented as a current asset in the balance sheet. The carrying amount of inventories is classified as either finished goods, work in progress, or raw materials and supplies, depending on the nature of the inventory.
Disclosure
- The accounting policies adopted in measuring inventories, including the cost formula used.
- The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity.
- The amount of inventories recognized as an expense during the period.
- The amount of any write-down of inventories recognized as an expense in the period.
- The amount of any reversal of any write-down that is recognized as a reduction in the amount of inventories recognized as an expense in the period.
- The circumstances or events that led to the reversal of a write-down of inventories.
- The carrying amount of inventories pledged as security for liabilities.
