Quick Notes For Inventories

QUICK NOTES FOR INVENTORIES Held for sale in the ordinary course of business In the process of production for sale In form of materials or supplies to be consumed in production Purchased component Goods held by trader for sale Initial Cost of Inventories: AT COST COSTS OF PURCHASES: Comprises of: 1. Purchase price 2. Import duties and taxes 3. Transport and handling and costs directly attributable (Trade discount and rebated are deducted from costs of purchases) COSTS OF CONVERSION Includes costs of Direct Labor and Direct Materials i. Variable Production Overhead ii. Fixed production Overhead iii. Joint Products OTHER COSTS only to the extent of bringing “to their present location and condition” a. Borrowing costs b. Storage costs c. Designing products for specific customers EXCLUDE FROM COSTS OF INVENTORIES: 1. Abnormal amounts of wasted materials, labor or other production costs 2. Storage costs unless essential to production 3. Administrative overhead 4. Selling Costs 5. FOREX Differences 6. Interest Costs MANUFACTURING COMPANY Inventories of Merchandising and Manufacturing Companies In merchandising business, in which the entity buys and sells goods, their inventory is simply called merchandise inventory. In a manufacturing business where the entity buys raw materials to convert to finished goods, the inventories include: 1. Direct or Raw materials 2. Work-in-process 3. Finished goods Factory supplies (including indirect materials) Overview of Cost Flows the basic flow of costs in a job-order system begins by recording the costs of materials, labor, and manufacturing overhead. 1. Direct Material and direct labor costs are debited to the Work in Process account. Any indirect material or indirect labor costs are debited to the Manufacturing Overhead control account, along with any other actual manufacturing overhead costs incurred during the period. Manufacturing overhead applied to Work in Process using the predetermined rate. 2. The cost of finished goods is credited to Work in Process and debited to the Finished Goods inventory account. 3. When units are sold, their costs are credited to Finished Goods and debited to Cost of goods sold. REPURCHASE AGREEMENT Repurchase agreements is a contract in which an entity sells an asset and also promises of has the option to repurchase the asset. The repurchased asset may be the asset that was originally sold to the customer, an asset that is substantially the same as that asset, or another asset of which the asset that was originally sold is a component. Repurchase agreements generally come in three forms: a. An entity’s obligation to repurchase the asset (a forward) A forward contract means the entity has an obligation to repurchase the asset. Since control is not transferred to the customer, the company should account the contract: b. An entity’s right to repurchase the asset (a call option); An option means the entity has the right to repurchase the asset. Since control is not transferred to the customer, the company should accounts the contract c. An entity’s obligation to repurchase the asset at the customer’s request (a put option). A put option is a right of the customer to require the entity to repurchase the asset. Since control is not transferred to the customer, the company should account the contract: • • Customer has significant economic incentive to exercise the right – lease in accordance with PFRS 16 or financing arrangement Customer has no significant economic incentive to exercise the right – account as if it were sale with a right of return If the repurchase agreement is a financing arrangement, the entity shall continue to recognize the asset and also recognize the asset and also recognize a financial liability for any consideration received from the customer. The entity shall recognize the difference between the amount of consideration to be paid to the customer as interest and, if applicable, as processing or holding costs If the option lapses unexercised, an entity shall derecognize the liability and recognize revenue. CONSIGNMENT ARRANGEMENTS A product that has been delivered to another party may be held in a consignment arrangement if that other party has not obtained control of the product. Indicators that an arrangement is a consignment arrangement include, but not limited to, the following: a. The product is controlled by the entity until a specified event occurs, such as the sale of the product to a customer of the dealer or until a specified period expires. b. The entity is able to require the return of the product or transfer the product to a third party (such as another dealer) c. The dealer does not have an unconditional obligation to pay for the product (although it might be required to pay a deposit) Accordingly, the consignor shall not recognize revenue upon delivery of a product to the consignee. In other words, the consignor shall recognize revenue when: a. The consignee sold the product to a customer b. After an expiration of a specified period.