VALUATION OF INVENTORIES: A COST-BASIS APPROACH
In accounting, the term inventory refers to a stock of goods held for sale in the ordinary course of business or goods that will be used or consumed in the production of goods to be sold. A number of questions regarding inventory are addressed in this chapter; these include: (1) How does a periodic inventory system differ from a perpetual system? (2) What goods should be included in inventory? (3) What costs are included in inventory? (4) How will the selection of a particular cost flow assumption affect the income statement and balance sheet? (5) How do you compute the various layers of inventory when the dollar-value LIFO method is used?
SUMMARY OF LEARNING OBJECTIVES
- Identify major classifications of inventory. Only one inventory account, Inventory, appears in the financial statements of a merchandising concern. A manufacturer normally has three inventory accounts: Raw Materials, Work in Process, and Finished Goods. Companies report the cost assigned to goods and materials on hand but not yet placed into production as raw materials inventory. They report the cost of the raw materials on which production has been started but not completed, plus the direct labor cost applied specifically to this material and a ratable share of manufacturing overhead costs, as work in process inventory. Finally, they report the costs identified with the completed but unsold units on hand at the end of the fiscal period are reported ...