Rearch on Inventory

Topic7 Inventory 1 Identify the primary authoritative guidance for the accounting for inventories. What is the predecessor literature? FASB ASC 330 Inventory provides primary authoritative guidance for the accounting for inventory. The predecessor literature about it is Accounting Research Bulletins (ARB) No. 43 Chapter 4, paragraph 4 (Issued June, 1953) and Statement of Financial Accounting Standard (FAS) NO. 151 Inventory cost- an amendment of ARB No. 43, Chapter 4 (Issued November, 2004). 2 List the three types of goods that are classified as inventory. What characteristic will automatically exclude an item from being classified as inventory? Answer: Glossary (FASB ASC 330-10-20) 10-20: Inventory The term inventory embraces goods awaiting sale (the merchandise of a trading concern and the finished goods of a manufacturer), goods in the course of production (work in process), and goods to be consumed directly or indirectly in production (raw materials and supplies). This definition of inventories excludes long-term assets subject to depreciation accounting, or goods which, when put into use, will be so classified. The fact that a depreciable asset is retired from regular use and held for sale does not indicate that the item should be classified as part of the inventory. 3 Define â€Å"market† as used in the phrase â€Å"lower-of-cost-or-market† Answer: Glossary (FASB ASC 330-10-20) 10-20 Market: As used in the phrase lower of cost or market, the term market means current replacement cost (by purchase or by reproduction, as the case may be) provided that it meets both of the following conditions a. Market shall not exceed the net realizable value b. Market shall not be less than net realizable value reduced by an allowance for an approximately normal profit margin. 4 Explain when it is acceptable to state inventory above cost and which industries allow this practice. Answer: Stating Inventories Above Cost (FASB ASC 330-35) 35-16: It is generally recognized that income accrues only at the time of sale, and that gains may not be anticipated by reflecting assets at their current sales prices. However, exceptions for reflecting assets at selling prices are permissible for both of the following: a. Inventories of gold and silver,when there is an effective government-controlled market at a fixed monetary value b. Inventories representing agricultural, mineral, and other products, with all of the following criteria: 1. Units of which are interchangeable 2. Units of which have an immediate marketability at quoted prices 3. Units for which appropriate costs may be difficult to obtain. Where such inventories are stated at sales prices, they shall be reduced by expenditures to be incurred in disposal. 35-15: Only in exceptional cases may inventories properly be stated above cost. For example, precious metals having a fixed monetary value with no substantial cost of marketing may be stated at such monetary value; any other exceptions must be justifiable by inability to determine appropriate approximate costs, immediate marketability at quoted market price, and the characteristic of unit interchangeability. A brief summary about predecessor standards ARB NO. 43 Chapter4 (issued June, 1953), is predecessor standards that corresponds to the Codification. This chapter sets forth the general principles applicable to the pricing of inventories of mercantile and manufacturing enterprises. The standard gives a major objective of accounting for inventories and the primary basis of accounting, including how to allocate variable production overheads incurred in bringing an article to its existing condition and location. Cost for inventory purposes may be determined under several assumptions as to the flow of cost factors and enterprises should select one that most clearly reflects periodic income. This chapter also presents some of the valuation and estimation concepts that companies use to develop relevant inventory information. The basis of stating inventories must be consistently applied and should be isclosed in the financial statements. Statement of Financial Accounting Standard NO. 151 Inventory Costs amends the guidance in ARB No. 43, Chapter 4, â€Å"Inventory Pricing,† in order to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In addition, this Statement requires that allocatio n of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This amendment is issued in November 2004 and effective for inventory costs incurred during fiscal years beginning after June15, 2005