Financing and Reporting (Inventory) PRELIM

2 Classes of Inventory

1. Trading or Mechandising

2. Manufacturing

Trading or Merchandising

concern buy products that are ready for resale to customers (Merchandise Inventory)

Manufacturing

2. concern is one that buy raw materials and converts them to finished products.

   A. Finished Goods

   B. Goods in Process (In the making)

   C. Raw Materials

   D. Factory or Manufacturing Supplies

Costs of Inventories

1. Costs of Purchases

2. Cost of Conversion

3. Other Costs

Costs of Purchases

Purchases Price

Costs of Conversion

(Labor and overhead) [Only for manufacturing entity]

Other Costs

Any additional costs that the business has already become responsible for that are necessary to get the inventories to where they are now and ready for sale or use (such as transport, handling, and storage costs before they are ready.)

Exclusion from Costs of Inventories

A. Abnormal Costs

B. Storage Costs

C. Administrative Overheads(OPEX)

D. Selling Costs

Abnormal Costs

Unusual or excessive costs that happen because of inefficiencies, mistakes, or abnormal events, and are not included in the cost of inventories.

Storage Costs

Storage costs are the costs of keeping inventories in a warehouse or storage area.

Administrative Overheads

General office and management costs that are not directly related to purchasing, transporting, or producing the inventories, so they are treated as expenses and not included in the cost of inventories

Selling Costs

Selling costs are the costs a business spends to sell its products to customers.

Trade Discount

They are already deducted from the list price before the invoice is made.

Cash Discount

These are deduction from the invoice price when payment is made within the discount period

Accounting Methods for Cash Discounts

Gross Method

Net Method

Gross Method

Purchases Discount is recognized if payment is made within discount period

Net Method

Purchases Discount Lost (other expense) is recognized if payment is made beyond the discount period

Inventory Accounting Systems

Periodic System

Perpetual System

Periodic System

Physical Count at the end of the reporting period

Perpetual System

A continuos record of the movement of the items of its inventory is maintained