FAR: A Fastrack of Inventories

Inventories

(A QuickNotes)

As defined by IAS 2: 

Inventories are assets: a) held for sale in the ordinary course of business 
b) in the process of production for such sale 
c) in the form of materials or supplies to be consumed in the production process or in the rendering of the services.

The following are the Rules in capitalizing:

1. Direct Cost (Capitalized)

•   To bring the inventory to 

       1. Location

       2. Condition intended by management

2. Insurance 

•   If it is in In-Transit      -Inventory
•   If it is in Work-in-Process -Inventory
•   If it is in Finished Goods  -Prepaid Insurance; Insurance Expense when used

3. Freight

•  Freight-In (Shipping point) -Inventory (Buyer always)
•  Freight-Out (Distribution Cost)- Selling Expense/Distribution cost of the seller; never becomes inventory
•  From consignor to consignee- Inventory
•  From consignee to consignor- Expense

4. Supplies

• Factory- Factory Overhead
• Office- Prepaid Supplies

5. Taxes

• Refundable Taxes- not inventory. It may be recovered by the company such as VAT. 
• Nonrefundable Taxes- Inventory. Example: Excise Tax and Percentage Tax

6. Inventory in Foreign Currency

• Use historical cost (Nonmonetary) Exchange rate of buyer

7. If on Deferred Items

• The difference between the credit and cash price is treated as an interest expense.

For the detailed discussion, see the table below:

List of Items Related to Inventories

Treatment of Overhead

Fixed Overhead shall be allocated based on the normal capacity while the variable overhead shall be allocated based on the actual capacity

Special Valuations

• As a rule, inventories are measured at the lower of cost and net realizable value
• Harvested agricultural crops or extracted mineral ores assured to be sold under a forward contract or government
• Commodities of broker-trader may be measured at fair value less cost to sell

"Bill and Hold" Sales

• Sales where delivery is delayed at the buyer's request but the buyer takes the title and accepts billing
• Revenue is recognized when the buyer takes the title, provided: a) it is probable that delivery will be added, b) the item is on hand, identified and ready for delivery at the time of sale, c) the buyer specifically acknowledges the deferred delivery instructions, d) the usual payment terms apply
• Revenue is not recognized when there is simply an intention to acquire or manufacture the goods in time for delivery.

Lay-Away Sales

• Sale in which the goods are delivered only when the buyer makes final payment in a series of installments
• Revenue is recognized when the goods are delivered.