Corporate Financial Reporting and Analysis, 3rd Edition

Chapter 9

Accounting for Inventory

Introduction

Retail, distribution, and manufacturing companies purchase or produce goods and then try to sell them for a profit. These goods are referred to as “inventory” and are classified as a current asset, often the largest current asset on a company’s balance sheet. Both US GAAP and International Financial Reporting Standards (IFRS) define inventories as assets that are held for sale in the ordinary course of business, in the process of production or for sale in the form of materials, or supplies to be consumed in the production process or in rendering services. Thus, inventory can take any of the following physical forms: raw materials and supplies, work-in-process, or finished goods. Most companies report an aggregate sum for all inventories on the balance sheet, with a more detailed description of the physical state of inventory provided in the notes.

By contrast, Procter & Gamble Co. (P&G), a global giant in personal care, household cleaning and pharmaceutical products, discloses each class of inventory directly on its balance sheet – see Table 9.1. We chose P&G as an example because its balance sheet allows us to see how costs flow through the inventory accounts as the operating cycle of the business turns. Here’s how the process unfolds’

Table 9.1 Current assets of Procter & Gamble (amounts in millions)

June 30
2010	2009
Current assets
Cash and cash equivalents	$2,879	$4,781
Accounts receivable	5,335	5,836
Inventories ...