Accounting for Inventories

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Accounting for Inventories

GAAP

Accounting Research Bulletin (ARB) No. 43, Chapter 4, June 1953

Inventory Recording System

Perpetual Inventory System

Periodic Inventory System

Inventory Valuation Methods

      First-in First-out (FIFO)
      Last-in First-out (LIFO)
      Moving Average Method
      Weighted Average Method
      Dollar Value LIFO

Lower of Cost or Market (LCM)

Inventories are valued at cost or market, whichever is lower.
[ARB No. 43, Chapter 4, Para. 8]

Market Value of Inventories [ARB No. 43, Chapter 4, Para. 9]

Market value = Current replacement cost

Upper limit (Ceiling) of Market value = Net Realizable Value (NRV)

Lower limit (Floor) of Market value
= Net Realizable Value (NRV) - Normal Profit Margin

Net Realizable Value (NRV)
= Estimated Selling Price - Cost of Completion and Disposal

Items to be included in inventories

      Goods in transit
      FOB destination --> Seller's Inventory
      FOB shipping point --> Buyer's Inventory

Consigned goods are consignor's inventory

Goods sold by installment sales are not included in seller's inventory.
Profit on installment sales is recognized in proportion to cash collected.

Examples of Inventory Valuation

Journal entries for perpetual and periodic inventory systems

Examples of FIFO, LIFO, Average methods

Examples of Dollar Value LIFO

Examples of Lower of Cost or Market (LCM)

Principles of Accounting Course: Key Topics

Accounting Journal Entry Examples

Accounting Equation - Review and Examples

Double Entry Recording of Accounting Transactions

Debit Accounts

Credit Accounts

Asset Accounts

Liability Accounts

Equity Accounts

Revenue Accounts

Expense Accounts

U.S. GAAP by Topic

International Financial Reporting Standards (IFRS)

Accounting Topics

Inventory Valuation Methods

Depreciation Methods

Revenue Recognition Principle

Accrual Basis vs. Cash Basis Accounting

Basics of Journal Entries

Ratios for Financial Statement Analysis

Overview of Financial Statements