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I. OBJECTIVE
1. To provide guidelines on the accounting policy for inventories
II. DEFINITION OF TERMS
1. Finished Goods Inventory – It includes inventory which is fully processed.
2. Merchandise Inventory – It includes inventory ready for sale.
3. Raw Materials Inventory – It includes materials for process.
4. Work In Process Inventory – It includes materials not fully processed or completed.
III. GENERAL POLICIES
The inventory shall be recognized if and only if:
• It is probable that future economic benefit will flow to the entity
• It can be measured reliably
*For the purchase of goods/ services, FOB DESTINATION should be used in recognizing the owners of goods in transit. This means that the goods/services will be considered as part of inventory only upon receipt of such. While goods are in transit, ownership of such still belongs to the seller. Any loss or damages will be shouldered by the seller. The risk of loss or damages will be shouldered by the buyer once he already received the goods/ services.
Measurement:
a) Initial Measurement
Cost should include all:
• Costs of purchase (including taxes, transport, and handling) net of trade discounts received
• Costs of conversion (including fixed and variable manufacturing overheads), and;
• Other costs incurred in bringing the inventories to their present location and condition
Inventory cost should not include:
• Abnormal waste
• Administrative overheads unrelated to production
• Foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency
• Interest cost when inventories are purchased with deferred settlement terms
• Selling costs
• Storage costs
b) Subsequent Measurement
• Write-Down to Net Realizable Value
NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. Any write-down to NRV should be recognized as an expense in the period in which the write-down occurs. Any reversal should be recognized in the income statement in the period in which the reversal occurs.
• Method of Recording Inventory
First-in, first-out method should be used in recording the inventory. The items first received should be the first to issue which costs corresponds when purchased. The remaining inventory should be recorded based on the prices recently.
• Expense Recognition
When inventories are sold and revenue is recognized, the carrying amount of those inventories is recognized as an expense (often called cost-of-goods-sold). Any write-down to NRV and any inventory losses are also recognized as an expense when they occur.
Inventory is presented as single line item and part of current assets:
• Raw Materials Inventory
• Work In Process Inventory
• Finished Goods Inventory
• Merchandise Inventory
IV. PROCEDURE FLOWCHART
Flowchart Title
(Not Applicable)
V. REFERENCE/INTERFACE PROCESS
Document Title
(Not Applicable)
VI. FORMS AND RECORDS
Form Title
(Not Applicable)
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