PAS 2 Inventories

Learning Objectives
• Define inventories.
• Measure inventories and apply the cost
formulas.
• State the accounting for inventory write-down
and the reversal thereof.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Inventories

Inventories are assets:

a. Held for sale in the ordinary course of business
(Finished Goods);
b. In the process of production for such sale (Work In
Process); or
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).

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Standards (by: Zeus Vernon B. Millan)
Financial statement presentation

• All items that meet the definition of inventory are

presented on the statement of financial position as one
line item under the caption “Inventories.” The
breakdown of this line item (as finished goods, WIP and
Raw materials) is disclosed in the notes.
• Inventories are normally presented in a classified
statement of financial position as current assets.

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Standards (by: Zeus Vernon B. Millan)
Measurement
• Inventories are measured at the lower of cost and net
realizable value (NRV).

• The cost of inventories comprise all costs of purchase, costs of

conversion and other costs incurred in bringing the inventories
to their present location and condition.
• Net realizable value (NRV) is 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.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Costs that are EXPENSED when incurred

1. Abnormal amounts of wasted materials, labor or other production

costs.
2. Selling costs, for example, advertising and promotion costs and
delivery expense or freight out.
3. Administrative overheads that do not contribute to bringing
inventories to their present location and condition.
4. Storage costs, unless those costs are necessary in the production
process before a further production stage, (e.g., the storage costs of
partly finished goods may be capitalized as cost of inventory, but the
storage costs of completed finished goods are expensed).

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Standards (by: Zeus Vernon B. Millan)
Cost Formulas
1. Specific identification - shall be used for inventories that are
not ordinarily interchangeable (i.e., used for inventories that are
unique). Cost of sales is the cost of the specific inventory that was
sold.
2. FIFO – cost of sales is based on the cost of inventories that were
purchased first. Consequently, ending inventory represents the cost
of the latest purchases.
3. Weighted Average Cost – cost of sales is based on the average
cost of all inventories purchased during the period.
 Wtd. Ave. Cost = (TGAS in pesos ÷ TGAS in units)

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Standards (by: Zeus Vernon B. Millan)
Write down of inventories

• Inventories are usually written down to net realizable value on an

item by item basis.
• If the cost of an inventory exceeds its NRV, the inventory is written
down to NRV, the lower amount. The excess of cost over NRV
represents the amount of write-down.

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Standards (by: Zeus Vernon B. Millan)
Reversal of write-downs

• The amount of reversal to be recognized should not

exceed the amount of the original write-down
previously recognized.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Recognition as an expense

• The carrying amount of an inventory that is sold is charged as

expense (i.e., cost of sales) in the period in which the related revenue
is recognized. Likewise, 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.

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Standards (by: Zeus Vernon B. Millan)
 APPLICATION OF
CONCEPTS
PROBLEM 3: FOR CLASSROOM DISCUSSION

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 QUESTIONS????
 REACTIONS!!!!!

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Standards (by: Zeus Vernon B. Millan)
 END
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