| Statement
1--Definition of the term "inventory:" |
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items of
tangible, personal property
which are |
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held for sale in the
ordinary course of
business (merchandise inventory, or finished goods
inventory) |
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in the process of
production
for sale (goods
in process) |
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to be currently
consumed in
the production
of goods or services to be available for sale |
| Statement
2--Objective of accounting for inventories |
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a major objective of
accounting for inventories
is the proper determination of income through the
process of matching
appropriate
costs against revenues. |
| Statement
3--Primary basis of accounting for inventories |
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The primary basis of
accounting for inventories
is cost, which is defined as the price paid or
consideration given to
acquire
an asset. |
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cost--> the sum of
the
expenditures and
charges directly or indirectly incurred to bring
an article to its
existing
condition and location. |
| Statement
4-- Cost flow assumptions |
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Cost may be
determined
under any one
of several assumptions as to the flow of cost
factors (such as first
in,
first out, last in, first out); the major
objective should be to
choose
the one which, under the circumstances most
clearly reflects periodic
income.
Note:
International Financial Reporting Standards bar
LIFO.
The
U.S. Internal Revenue Code also insists that
companies must use the
same system of reporting inventory to
shareholders and
lenders that the companies use to file with the
Internal Revenue
Service. |
| Statement
5--Departure from the cost basis |
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A departure from the
cost
basis of pricing
the inventory is required when the utility of the
goods is not longer
as
great as its cost. This is accomplished by stating
such goods at a
lower
level commonly designated as market. |
Statement
6--Meaning of Market exercise
on
Statement No. 6
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Market
means
current replacement
cost, except that: |
|
(1) |
Market should not
exceed the net realizable
value (estimated selling price less cost of
completion and disposal);
sometimes
called the ceiling |
|
(2) |
Market should not be
less
than net realizable
value reduced by an allowance for an approximately
normal profit margin. |
| Statement
7--LCM application |
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Lower of
cost or
market may
be applied either directly to each item, to major
categories, or to the
total of the inventory. The method chosen
should be that which
more
clearly reflects periodic net income exercise
on
Statement No. 7 |
| Statement
8--Basis of stating inventories |
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Basis
should be
consistently
applied and should be disclosed in the financial
statements.
Whenever
a significant change is made, there should be
disclosure of the nature
of the change and if material, the effect on
income. |
| Statement
9--Inventories stated above cost |
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Only in
exceptional cases may
inventories properly be stated above cost. Must be
justifiable by
inability
to determine appropriate approximate cost (e.g.,
by-product
inventories),
immediate marketability at quoted market price
(e.g., farm
commodities),
and the characteristic of unit
interchangeability. When goods
are
stated above cost this fact should be fully
disclosed. |
| Statement
10--Losses on firm purchase commitments |
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Accrued net
losses on firm purchase
commitments for goods for inventory should be
recognized in the
accounts
and the amounts thereof separately disclosed in
the income statement. |