Accounting for Inventories

Accounting Study Guide

U.S. GAAP

IFRS, IAS

Accounting Topics

Financial Statements Overview

Accounting for Inventories

GAAP

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

Inventory Recording System

Perpetual Inventory System

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

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