The accounting for inventories is a major consideration for many entities because of its significance to both the income statement (cost of goods sold) and the balance sheet (current assets). Inventories are defined in ARB 43, Chapter 4 as
…those items of tangible personal property which are held for sale in the ordinary course of business, are in the process of production for such sale, or are to be currently consumed in the production of goods or services to be available for sale.
The complexity of accounting for inventories arises from factors that include
The high volume of activity (or turnover) and the associated challenges of keeping accurate, up‐to‐date records.
Choosing from among various cost flow alternatives that are permitted by GAAP.
Ensuring compliance with complex US income tax laws and regulations when electing to use the last‐in, first‐out (LIFO) method.
Monitoring and properly accounting for adjustments necessitated by applying the lower of cost or market method to the inventory.
There are two types of entities for which the accounting for inventories is relevant. The merchandising entity (generally referred to as a retailer, dealer, or wholesaler/distributor) purchases inventory for resale to its customers. The manufacturer buys raw materials, and processes those raw materials using labor and equipment into finished goods that are then sold to its customers. While the production process is progressing, the costs of the raw materials, salaries ...