Assertions (OROCA CAVE)
1.
Occurence
2.
Rights
3.
Obligation
4.
Completeness
5.
Accuracy
6.
Cut-Off
7.
Allocation
8.
Valuation
9.
Existence
*physical count, test count, test cut-off procedures, trace test counts, analytical procedures
Inventory Classifications:
1. Held for sale in the ordinary course of business;
(Finished Goods Inventory)
2. In the process of production for such sale;
(Work-in-Process (WIP) Inventory)
3. In the form of materials or supplies to be consumed in the production process or in the rendering of services.
(Raw Materials, Office Supplies, etc.)
Initial Valuation:
*at Cost
Subsequent Valuation:
*lower of Cost or Net Realizable Value
Net Realizable Value:
1. NRV of Finished Goods/Merchandise Inventory = Est. Selling Price
less Est. Cost to Sell
2. NRV of WIP Inventory = Est. Selling Price
less Est. Cost to Complete
less Est. Cost to Sell
3. NRV of Raw Materials and Supplies = Current Replacement Cost or Current Purchase Price
Freight Terms:
1.
FOB destination: "Free on Board until destination"
goods in transit=seller is owner ; freight=should be paid by seller
2.
FOB shipping point: "Free on Board until shipping point ONLY"
goods in transit=buyer is owner ; freight=should be paid by buyer
3.
Freight collect: freight=was paid by buyer (not necessarily shouldered by the buyer)
4.
Freight prepaid: freight=was paid by seller
5.
FAS (free alongside): "Free Alongside to the dock ONLY"
freight up to the dock=seller; cost of loading and shipment=buyer
6.
CIF (cost, insurance, freight): "Free until loading to the ship ONLY"
freight up to the dock and cost of loading=seller;
CIF and shipment=buyer
7.
Ex-ship: "Free until the goods exited the ship"
freight until unloading=seller;
Inventory Systems:
1
. Periodic: physical count at year end to determine COS and Inventory, End; inventory balance updated at year-end
2.
Perpetual: flow of goods is recorded every transaction; inventory balance always updated
List Price =is not the intended selling price of the seller
(Trade discounts) =are not recorded by the buyer or seller. Its deduction from the list price
will reflect the intended selling price
(Cash discounts) =are recorded by the buyer or seller as sales/purchase discount.
Invoice Price =is the net cost/sale price of the item.
Special Sale/Purchase Agreement
1.
Goods on Consignment: inventory of consignor/seller
2
. Sale on Approval: inventory of seller unless information identified that manifestation of approval has been made
3.
Inventory financing/Park sale/Product financing: inventory of seller
4.
Sale with right of return: inventor of seller unless right of return is considered normal in the industry (e.g. retail) or time for right of return has already lapsed
5.
Installment sales: inventory of buyer
6.
Segregated goods: mere segregation of goods does not exclude the same from the seller's inventory unless identified that sale is covered by a special sale agreement (BILL AND HOLD) as in when goods were already billed and awaiting the pick-up of the customer
Inventory Valuation:
1.
Specific Identification Method (SIM) - specific costs are attributed to identified items of inventory.
2.
First-in, first-out (FIFO) - assume that items purchased first are sold first, and consequently, items at the end of the period are those most recently purchased or produced.
3.
Weighted Average Cost - cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period
Other Notes:
1. Purchase or sale of goods with
right of repossession are still the inventory of the one who contains the right to repossess. Although there was a transfer of ownership, the goods can be bought back without restriction even if the present owner does not want to part with the goods.
2. The standard requires that all purchases must be recorded at net (
Net Method, net of all discounts). Discounts that were not taken are attributable to the management.
3.
Abnormal amounts of
wasted materials, labor and other production costs are excluded from the cost of inventories and recorded as expense.
Normal wastage are part of cost of sales.
4.
Storage costs relating to finished goods are expensed, while those relating to WIP are capitalized.
Sources: Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards
