Inventories - held for sale in the ordinary course of business; goods purchased and held for resale.
-finished goods, goods in process, materials and supplies.
Classes of Inventories
1. Trading concern
2. Manufacturing concern
Cost of Inventories
-cost of purchase
-cost of conversion
-other cost incurred in bringing
Cost formulas
a. First in, First Out (FIFO) - favors financial position; objection improper matching of cost against revenue (understatement COGS); inflation - highest net income; deflation - lowest net income
b. Weighted Average - total cost of goods available for sale divided by total number of units available for sale; easy to apply; argument - lag between current cost and inventory valuation
*Does not permit anymore
c. Last in, First Out (LIFO) - favors income statement; match current cost agains current revenue; objection - lag between inventory valuation and current replacement cost
d. Specific Identification - specific costs are attributed to identify items of inventory. Units on hand multiply by the actual unit cost.
Net Realizable Value - measurement of inventory; the estimated selling price less estimated cost of completion and disposal; item by item or individual basis
Cost < NRV (No accounting problem)
Cost > NRV (Measured at NRV but with proper treatment of the writedown of inventory to NRV - Allowance Method)
Entry:
Dr Loss on Inventory Writedown
Cr Allowance for Inventory Writedown
*The loss on inventory writedown is included in the computation of COGS
**