Inventory Subsequent Measurement

INVENTORIES FOB Shipping Point The owner of the Inventory at the point of shipment is the BUYER The owner of the Inventory at the point of destination is the SELLER GOODS IN TRANSIT FOB Destination. CONSIGNED GOODS The owner of the consigned goods is the CONSIGNOR SALES OUT ON APPROVAL As a general rule, the SELLER is the owner of the inventory except if the approval period expires and if it is under the approval of the BUYER Who is the owner of the Inventory? SALES WITH BUYBACK AGREEMENT SALES WITH RIGHT OF RETURN Buyback agreement is an arrangement to take back something as a condition of a sale, as by a supplier who agrees to purchase its customer's goods. Thus, the owner remains to be the SELLER Right of return means a customer is entitled to a full or partial refund of the amount paid for an inventory of previous or future purchases. Thus, the owner of the inventory is the BUYER INSTALLMENT SALES The owner of the inventory is the BUYER. Special-order goods While the process is on-going, the owner is the SELLER If the special order is complete, regardless of the delivery, the owner is the BUYER SEGREGATED GOODS IN THE WAREHOUSE Goods held for Processing, Storage, or shipment. The owner is the SELLER ACCOUNTING INVENTORY SYSTEMS It is a system that continuously updates the inventory based on the record and not based on physical count of inventory. Debit if Increase and credit inventory if otherwise. jewelry and cars. Therefore, inventory account is updated each purchase, sale and return. It is then used for Low-quantity but high-value items such as PERPETUAL SYSTEM Inventories XX Accounts Payable/cash xx Accounts Payable Inventory Accounts Receivable/cach xx Sales Cest of Goods Sold xx Inwentory Sales return, allowances, discount XX Accounts Receivable xx Inventory Cost of Goods Sold It does not update the records of inventory continuously but rather only when the financial statements are prepared at the end of the period. Since inventory is not updated from time to time, physical count is required to determine the "Ending Inventory." It is used for high-quantity but relatively low-value items. PERIODIC SYSTEM Purchases xx Freight-in TO RECORD PURCHASE TO RECORD PURCHASE RETURN, ALLOWANCE, AND DISCOUNT Accounts Payable/cash xx Accounts Payable xx Purchase Return XX Purchase Allowance xx Purchase Discount TO RECORD SALES Accounts seceivable/cash xx Sales return, allowances, discount xx TO RECORD SALES RETURN, ALLOWANCE, AND DISCOUNT Accounts Receivable XX Year-end adjustment for Periodic Inventory System NOTE! There is no Closing entry or adjustment for Perpetual Inventory System because the inventory account is updated every transaction. Unlike Perpetual System, Periodic System needs to be updated every year-end. The beginning balance is credited to remove the unadjusted balance of inventory in the company's book. On the other hand, Inventory, ending balance is debited to recognize the new and adjusted balance of the inventory. ACCOUNT TITLE Dr. Cr. Inventory, ending balance Purchase Return Purchase Allowance Purchase Discount Cost of Goods sold Purchases Freight-in Inventory, beginning balance Initially, Purchase return, allowances, and discounts are credited. During the year-end, debit these accounts so that the balances become zero. In other words, the closing entry for Purchase Return, allowances, and discount is to credit them. Initially, Purchases and Freight-in are debited to recognize them. During the year-end, credit these accounts so that the balances become zero. Beginning Inventory Add: Net purchases Total Goods Available for Sale XX Less: Ending Inventory Cost of Goods Sold It is possible that the records will not match with the physical count, this is called Inventory Shortage (if per record is greater than per physical count) or Inventory overage (if per record is lesser than per physical count). If the company is using Periodic system, there is no need for journal entry, however, if the company is using Perpetual System, then increase the account Cost of Goods sold if there is a shortage and decrease if otherwise. PERIODIC SYSTEM TO RECORD PURCHASE Purchases Freight-in Accounts Payable/cash Note! Purchases, under Periodic system can be accounted in two ways: Perpetual Inventory system does not use the account "Purchase" when purchasing inventories, instead, it debits the account "Inventory" immediately. Purchases are recorded at invoice price. Only record "Purchase discount account if the company took advantage of the discount. GROSS METHOD NET METHOD Purchases are recorded at invoice price net of cash discounts whether taken or not taken. Only record the "Purchase discount lost account if the discount is not taken. GROSS METHOD @Invoice Price Purchases Accounts Payable Accounts Payable Purchase Return TO RECORD PURCHASE TO RECORD PURCHASE RETURN NET METHOD Purchases Accounts Payable @Invoice Price less Cash discount Accounts Payable Purchase Return Accounts Payable Purchase discount Cash TO RECORD PAYMENT WITHIN THE DISCOUNT PERIOD Accounts Payable Cash Accounts Payable XX Cash TO RECORD PAYMENT BEYOND THE DISCOUNT PERIOD Accounts Payable Purchase Discount Lost XX Cash SUBSEQUENT MEASUREMENT: LOWER OF COST AND NET REALIZABLE VALUE COST OF INVENTORY Whichever is LOWER Had it been cost is greater than NRV. the entity should recognize Inventory write-down that is recognized as expense which means the account "Cost of Goods sold increases. If Cost > NRV With impairment If Cost < NRV No impairment NET REALIZABLE VALUE Raw Materials and Factory Supplies Work-in-Process Inventories. Finished Goods Example: COST 100 NRV 120 Lower 100 item I Item 2 200 300 150 150 ITEM-BY-ITEM BASIS Item 4 250 250 Item 3 400 500 1500 400 400 Item 5 480 1420 480 1,380 If the cost was less than NREV, there would have been a Reversal of Inventory write-down if there had been a previous inventory write-down. Thus, the "Cost of Goods sold" account would have decreased. Subsequent Measurement of Inventory = 1,380 Replacement Cost it is a cost that is required to replace any existing asset having similar characteristics. Estimated Selling price Estimated Cost to Sell - Estimated Cost to Complete Estimated Selling price - Estimated Cost to Sell Inventory Write-down is the difference between 1,380 and 1,500 which is equal to 120. Cost of Goods Sold Allowance for Inventory Write-down