| 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: |
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(1) |
Market should not
exceed the net realizable
value (estimated selling price less cost of completion and disposal);
sometimes
called the ceiling |
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(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 interchangeablitly. 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. |