Short Notes On Inventories

Key terms to note:

Inventories are current assets:

• held for sale in the ordinary course of business,
• in the process of production for such sales;or
• in the form of materials or supplies to be consumed in the production process or in the rendering of services

Net realizable value:

• Is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale

Inventories can include any of the following:

• Goods purchased and held for resale, eg goods held for sale by a retailer or land & building for resale
• Finished goods produced
• Work in progress being produced
• Materials and supplies awaiting use in the production process(raw materials)

Therefore some COMMON classifications of inventories often seen in the balance sheet are:

Merchandise; Production supplies; Materials; Work-In-Progress and Finished Goods

How do we measure or value inventories:

• Inventories should be measured at the LOWER of cost and net realizable value. re: the value of these inventories is calculated by taking the lower of cost and net realizable value for EACH SEPARATE item or GROUP of inventory items.

The  COST of inventories comprises:

(a) Purchase

( viz: purchase price + import duties+ taxes +transport+handling & any other cost directly attributable to the acquisition of finished goods, services and materials less trade discount,rebates & other similar reduction)

(b) Costs of conversion

Consists of two parts (a) cost directly related to the unit of production,eg direct materials, direct labour (b) fixed and variable production overheads that are incurred in converting materials into finished goods, allocated on a systematic basis.

(c) Other costs incurred in bringing the inventories to their present location and condition.

Methods to measure or value inventories:

• First-in, first-out (FIFO) method
• Last-in, first-out (LIFO) method
• Weighted average cost method.
• Standard costs

ACCOUNTING TREATMENT OF INVENTORIES:

(a) The value of closing inventories is accounted for in the NOMINAL LEDGER by

debiting an inventory account and crediting the trading account at the end f an accounting period.

{ The inventory will therefore always have a debit balance at the end of a period and this balance will be shown in the balance sheet as a current asset for inventories }

(b) OPENING INVENTORIES brought forward in the inventory account are transferred to the trading account and so at the end of the accounting year, the balance on the inventory account ceases to be the opening inventory b/f, and becomes instead the closing inventories c/f

Related posts:

1. Glossary Of Accounting Term-Alphabet I
2. Revision Notes on Depreciation Of Fixed Assets
3. Assets(Current Asset) Side Of The Balance Sheet(Part2of3)
4. Glossary Of Accounting Term-Alphabet N
5. Revision Notes:The Recording Process

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