Wiley GAAP: Practical Implementation Guide and Workbook

Chapter 8. INVENTORY (ASC 330)

BACKGROUND AND INTRODUCTION

The Standard prescribes the accounting treatment for inventories. The main issue with respect to accounting for inventory is the amount of cost to be recognized as an asset. The Standard provides guidance on the determination of the cost and subsequent recognition of expense (including write-down of inventory to its market value). The Standard also provides guidance on the cost flow assumptions ("cost formulas") that are to be used in assigning costs to inventories.

SCOPE

This Standard applies to all inventories other than

• Not-for-profit entities.

• Regulated entities.

DEFINITIONS OF KEY TERMS

Dollar-value LIFO. A variation of conventional LIFO in which layers of inventory are priced in dollars adjusted by price indices instead of being priced at unit prices.

Gross profit method. A method used in interim periods to estimate the amount of ending inventory based on the cost of goods available for sale, sales, and the expected gross profit percentage.

Inventory. Those items of tangible personal property that are (1) held for sale in the normal course of business (finished goods), (2) in the process of being produced for that purpose (work-in-process), or (3) to be used in the production of such items (raw materials).

LIFO liquidation. The permanent elimination of all or part of the LIFO base or old inventory layers when inventory quantities decrease. This inventory decrement can distort gross profit, operating income, and net income since ...