cfas

• Inventories


  Assets held for sale in the ordinary course of business, in the process of production for such sale or in the form of materials or supplies to be consumed in the production process or in the rendering of service
• Classes of Inventories


  • Inventories in trading concern
  • Inventories of manufacturing concern
• Trading concern


  One that buys and sells goods in the same form as purchased. The term "merchandise inventory" is generally applied to goods held by a trading concern
• Manufacturing concern


  One that buys goods which are altered or converted into another form before they are made available for sale
• Inventories of manufacturing concern

  • Raw materials
  • Work-in-Process
  • Finished goods
  • Factory or manufacturing supplies
• Raw materials


  Materials or substances used in the primary production or manufacturing of goods
• Work-in-process (WIP)


  Partially finished goods awaiting completion
• Finished goods


  The final stage of inventory, in which the product has reached a level of completion where the subsequent stage is the sale to a customer
• Factory or manufacturing supplies


  Maintenance materials, janitorial supplies, and items that are considered incidental to the production process
• Elements of Manufacturing Cost

  • Direct Materials
  • Direct Labor
  • Manufacturing Overhead
• Direct Materials


  Materials that became a physical part of a finished product
• Direct Labor


  Compensation of employees or workers who physically convert raw materials into finished goods
• Manufacturing Overhead


  All manufacturing costs that cannot be classified as direct materials or direct labor
• Inventory represents one of the most important assets of a business because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders
• Possessing a high amount of inventory for a long time is usually not advantageous for a business because of storage costs, spoilage costs, and the threat of obsolescence
• Possessing too little inventory also has its disadvantages
• Businesses with Inventory


  • Merchandiser
  • Manufacturer
• Merchandiser


  One inventory account, purchase goods in form ready for sale
• Manufacturer


  Three accounts: Raw materials, Work in process, Finished goods
• Companies use one of two types of systems for maintaining inventory records — perpetual system or periodic system
• Perpetual System


  1. Purchases of merchandise are debited to Inventory. 2. Freight-in is debited to Inventory. Purchase returns and allowances and purchase discounts are credited to Inventory. 3. Cost of goods sold is debited and Inventory is credited for each sale. 4. Subsidiary records show quantity and cost of each type of inventory on hand
• The perpetual inventory system provides a continuous record of Inventory and Cost of Goods Sold
• All companies need periodic verification of the inventory records by actual count, weight, or measurement, with the counts compared with the detailed inventory records
• Companies should take the physical inventory near the end of their fiscal year, to properly report inventory quantities in their annual accounting reports
• Basic Issues in Inventory Valuation

  • The physical goods (goods on hand, goods in transit, consigned goods, special sales agreements)
  • The costs to include (product vs. period costs)
  • The cost flow assumption (specific Identification, average cost, FIFO, retail, etc.)
• A company should record purchases when it obtains legal title to the goods
• Costs Included in Inventory

  • Product Costs - costs directly connected with bringing the goods to the buyer's place of business and converting such goods to a salable condition
  • Period Costs – generally selling, general, and administrative expenses
• Treatment of Purchase Discounts


  Gross vs. Net Method
• The effect of an error on net income in one year (2010) will be counterbalanced in the next (2011), however the income statement will be misstated for both years
• Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied
• Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred
• Prospective application of a change in accounting policy and of recognizing the effect of a change in an accounting estimate, respectively, are: 1) Applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed; and 2) Recognizing the effect of the change in the accounting estimate in the current and future periods affected by the change
• Users of financial statements are assumed to have a reasonable knowledge of business and economic activity and accounting and a willingness to study the information with reasonable diligence
• Impracticable


  Applying a requirement is impracticable when the entity cannot apply it after making every possible effort
• Prospective application


  • Applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed
  • Recognizing the effect of the change in the accounting estimate in the current and future periods affected by the change
• Who will identify the change in financial statements is inevitable
• Users of financial statements

  Assumed to have a reasonable knowledge of business and economic activity and accounting and a willingness to study the information with reasonable diligence
• Characteristics of an accounting policy

  • Relevant
  • Reliable
  • Faithful
  • Having economic substance
  • Neutral
  • Prudent
  • Complete
• Relevant accounting policy


  Relevant to the economic decision making needs of user
• Reliable accounting policy


  • Represents faithfully the financial position, financial performance and cash flows of the entity
  • Reflect the economic substance of transactions, other events and conditions, and not merely legal form
  • Are prudent
  • Are complete in all material respects