Valuation of Inventories

Major Classifications of Inventories– Merchandising

– Manufacturing

» raw materials

» work-in-process

» finished goods

Inventory Management & Control– Perpetual System

– Periodic System

Basic Inventory Valuation

Valuation of Inventories (cont.)

Physical Goods to be Included– Goods in transit

» f.o.b. shipping point

» f.o.b. destination

– Consigned goods

» consignor owns the goods

» consignee tries to sell them

– Special sale agreements

» Sales with buy-back agreements

» Sales with high rate of return

» sales on installment

Valuation of Inventories (cont.)

Inventory Errors– ending inventory misstated

– beginning inventory misstated

– both misstated

– purchases misstated

Valuation of Inventories (cont.)

Costs to be Included in Inventory– Product costs

– Period costs

– Manufacturing costs

– Variable versus absorbtion costing

– Purchase discounts

Cost Flow Assumptions– Specific identification

– First In, First Out (FIFO)

– Last In, Last Out (LIFO)

– Average Cost

Valuation of Inventories (cont.)

Special LIFO Problems– LIFO liquidations

– LIFO pools

Basis for Cost Flow Assumption Selection Summary

Inventories: Additional Valuation Problems

Lower of Cost or Market– Ceiling and floor

– Methods of applying lower of cost or market

– Recording market instead of cost

– Evaluation of lower of cost or market rule

Valuation at Net Realizable Value Valuation Using Relative Sales Value Purchase Commitments Financial Statement Presentation & LIFO Reserve