FAR 6813 – INVENTORY COST FLOW
PAS 2 – Inventories, expressly provides that the cost
of inventories shall be determined by using either:
1. First in, First out (FIFO)
2. Weighted Average
a. Periodic
b. Perpetual (Moving Average)
FIRST IN, FIRST OUT (FIFO)
- Assumes that the goods first purchased are
first sold and consequently the goods in the
ending inventory are those most recently
purchased
- Inventory is thus stated in accordance with
recent prices while COGS is representative of
old prices
- Results to highest net income in a period of
inflation and lowest net income in a period of
deflation
WEIGHTED AVERAGE
- Average unit cost is computed by dividing
total COGAS by the total units available for
sale
Cost of goods available for sale xx
Divided by units available for sale xx
Weighted average unit cost xx
MOVING AVERAGE
- A new weighted average unit cost must be
computed after every purchase and purchase
return
SPECIFIC IDENTIFICATION
- Means that specific costs are attributed to
identified items of inventory
RELATIVE SALES PRICE METHOD
- Used when different commodities are
purchased at lump sum
- Single cost is apportioned based on their
respective sales price
LOWER OF COST OR NET REALIZABLE VALUE
(LCNRV)
PAS 2 – provides that inventories shall be measured
at LCNRV
NET REALIZABLE VALUE
Selling price xx
Less: Cost of completion xx
Cost of disposal xx xx
Net realizable value xx
Cost of inventories may not be recoverable under the
following circumstances:
a. Inventories are damaged
b. Inventories have become wholly or partially
obsolete
c. Selling prices have declined
d. Estimated cost of completion or the estimated
cost of disposal has increased
- Inventories are written down to NRV on an
item by item or individual basis
ACCOUNTING FOR INVENTORY WRITEDOWN
1. Cost < NRV = no adjustment
2. Cost > NRV = the inventory is measured at
NRV
a. Direct method or COGS method
b. Allowance method or loss method
DIRECT METHOD
- Loss on inventory write down is not
accounted for separately but buried in COGS
Inventory, End xx
Income Summary xx
ALLOWANCE METHOD
- Inventory is recorded at cost an any loss on
write down is accounted for separately
- If the required allowance increases, an
additional loss is recognized
- If the required allowance decreases, a gain on
reversal of write down is recorded
- However, the gain is limited only to the extent
of allowance balance
Loss on inventory writedown xx
Allowance for inv. writedown xx
PURCHASE COMMITMENT
- Obligations of the entity to acquire certain
goods sometime in the future at a fixed price
and fixed quantity

Recognize loss and liability:

1. Contract is non-cancelable
2. Future loss is probable and material
3. Amount of commitment can be reasonably
estimated

Loss on purchase commitment xx

Estimated liab. for purchase commitment xx

Estimated liab. for purchase commitment xx

Gain on purchase commitment xx

If market price declined at date of purchase:

Purchases (Lower of cost or MP) xx
Loss on purchase commitment xx
Estimated liab. for purchase commitment xx
Accounts payable xx

If market price rises at date of purchase:

Purchases (Lower of cost or MP) xx
Estimated liab. for purchase commitment xx
Accounts payable xx
Gain on purchase commitment xx