CHAPTER 10

Trading concern

is one that buys and sells goods in the same form purchased.

Merchandise inventory

generally applied to goods held by a trading concern.

Financial accounting and inventory

considers the general issue of costing inventory but limits its consideration to merchandise inventory or inventory purchased for resale.

Manufacturing concern

is one that buys goods which are altered or converted into another form before they are made available for sale.

Inventories of a manufacturing concern

finished goods, goods in process, raw materials and factory or manufacturing supplies.

Finished goods

are completed products which are ready for sale.

Goods in process / Work in process

partially completed products which require further process or work before they can be sold.

Raw materials

goods that are to be used in the production process. No work or process has been done on them as yet.

Indirect Materials

Manufacturing supplies may be referred to as?

Goods includible in the inventory

all goods to which the entity has title shall be included in the inventory, regardless of location.

Affirmative legal test

goods shall be included in the inventory.

Negative legal test

goods shall be excluded from the inventory.

consignment

method of marketing goods in which the owner called the consignor transfers physical possession of certain goods to an agent called the consignee who sells them on the owner’s behalf.

Inventory treatment of consigned goods

Consigned goods shall be included in the consignor’s inventory and excluded from the consignee’s inventory.

Freight and handling charges on consigned goods

Freight and other handling charges on goods out on consignment are part of the cost of goods consigned.

FOB destination

ownership of goods purchased is transferred only upon receipt of the goods by the buyer at the point of destination; property of the seller.

FOB shipping point

ownership is transferred upon shipment of the goods and therefore, the goods in transit are the property of the buyer.

Freight collect

freight charge on the goods shipped is not yet paid. The common carrier shall collect the same from the buyer. Thus, the freight charge is actually paid by the buyer.

Freight prepaid

freight charge on the goods shipped is already paid by the seller.

FAS (Free Alongside Ship)

seller must bear all expenses and risk involved in delivering the goods to the dock next to or alongside the vessel on which the goods are to be shipped. Thus, the buyer bears the cost of loading and shipment and thus, title passes to the buyer when the carrier takes possession of the goods.

CIF (Cost, Insurance and Freight)

Under this shipping contract, the buyer agrees to pay in a lump sum the cost of the goods, insurance cost and freight charge.

CF (Cost and Freight)

means that the buyer agrees to pay in a lump sum the cost of the goods and freight charge only.

Ex-ship

Seller bears all expenses and risk of loss until the goods are unloaded at which time title and risk of loss shall pass to the buyer

Periodic system

• calls for the physical counting of goods on hand at the end of the accounting period to determine quantities.The quantities are then multiplied by the corresponding unit costs to get the ending inventory value. the cost of goods sold is computed only at the end of reporting period by deducting the physical inventory from the cost of goods available for sale.

• generally used when the individual inventory items have small peso investment, such as groceries, hardware and auto parts.

Perpetual system

• requires the maintenance of records called stock cards that usually offer a running summary of the inventory inflow and outflow.

• is commonly used where the inventory items treated individually represent a relatively large peso investment such as jewelry and cars.

• physical count once a year

Trade discounts

deductions from the list or catalog price in order to arrive at the invoice price which is the amount actually charged to the buyer.

Not recorded

Purpose of trade discounts

to encourage trading or increase sales. also suggest to the buyer the price at which the goods may be resold.

Cash discounts

deductions from the invoice price when payment is made within the discount period.

encourage prompt payment.

Recorded

Purchase discount

deducted from purchases to arrive at net purchases.

Sales discount

deducted from sales to arrive at net sales revenue.

Net method

represents the cash equivalent price on the date of payment and therefore the theoretically correct historical cost.

Gross method

most entities record purchases at gross invoice amount.

Gross method and matching principle

gross method violates the matching principle because discounts are recorded only when taken or when cash is paid rather than when purchases that give rise to the discounts are made.

Allocation issue under gross method

This procedure does not allocate discounts taken between goods sold and goods on hand.

Bookkeeping advantage of gross method

The gross method is more convenient than the net method from a bookkeeping standpoint.

Reliability of gross method

If applied consistently over time, the gross method usually produces no material errors in the financial statements.

Cost of inventory

shall comprise cost of purchase, cost of conversion and directly attributable cost incurred in bringing the inventory to the present location and condition.

Cost of purchase

comprises the purchase price, import duty, irrecoverable tax, freight, handling and other cost directly attributable to the acquisition.

Exclusion from cost of purchase

shall not include foreign exchange differences which arise directly from the acquisition of inventory involving a foreign currency.

Directly attributable cost

cost incurred in bringing the inventory to the present location and condition intended for sale.

Cost recognized as expense

Abnormal amount of wasted material, storage cost, administrative overhead and distribution or selling cost