Accounting

The Financial Reporting of Inventories (Portfolio 5168)

  • This Portfolio reviews the common methods of reporting inventories, the financial statement implications of changing methods, and the rules for disclosing methods and practices.

Description

BNA Tax and Accounting Portfolio 5168-2nd, Benke and Vitray, The Financial Reporting of Inventories (Accounting Policy and Practice Series), reviews the most common methods of reporting inventories, the financial statement implications of changing inventory methods, and the rules for disclosing inventory methods and practices in financial statements.

The selection of an inventory method will have a significant effect on the financial reporting of a company. Because it is rarely possible for a company to accurately trace individual items purchased for inventory then sold to customers, the company must make an assumption about the flow of goods into the company. Then, when it sells the goods, it must make an assumption about the allocation of inventory costs between cost of goods sold and ending inventory. The most common cost flow assumptions are first-in, first-out (FIFO), last-in, last-out (LIFO), and average cost.

Profitability and measures of profitability will rise or fall, depending on the inventory method selected. In inflationary times, FIFO will report a lower Cost of Goods Sold than either LIFO or average cost. Similarly, in inflationary times, LIFO will report a higher Cost of Goods Sold than either FIFO or average cost, and average cost will report a Cost of Goods Sold between FIFO and LIFO. This Portfolio explains the rules and common practices used in selecting and implementing these methods.

The financial reporting of inventories is an enriching subject. On the surface, inventory accounting seems easy to understand and execute. Further understood, the financial reporting of inventories seems unnecessarily and sometimes confusingly complicated. Even further understood, the financial reporting of inventories becomes a perplexing subject with no final answer on how inventory should be accounted for, how it should be measured to determine if it is being efficiently managed (inventory turnover, etc.), or how the accounting policies and practices surrounding it should be disclosed in financial statements. This Portfolio not only explains the existing accounting rules regarding inventory but also identifies areas in which rules do not exist and industry practice is used.

This Portfolio may be cited as BNA Tax and Accounting Portfolio 5168-2nd, Benke and Vitray, The Financial Reporting of Inventories (Accounting Policy and Practice Series). Within the Accounting Portfolio Series, however, references to the Portfolios will include only the Portfolio numbers and titles.

Table of Contents

I. Purpose and Scope of this Portfolio
II. Basic Inventory Accounting Concepts
III. Perpetual Inventory Systems: The FIFO, LIFO, and Moving Average Methods for Recording Inventories
IV. Periodic Inventory System: The FIFO, LIFO, and Weighted Average Methods for Recording Inventories
V. Journal Entries for Perpetual Versus Period Inventory Systems
VI. Adopting an Inventory Method
VII. Special Issues With LIFO
VIII. Dollar-Value LIFO
IX. Retail Inventory Methods
X. Changing Inventory Methods
XI. Inventories of Merchandisers
XII. Inventories of Manufacturers
XIII. Practical Methods of Forecasting Inventory Levels
XIV. Inventory Disclosures
XV. IFRS Rules on Inventories

Ralph Benke, Jr.
Professor Emeritus of Accounting
James Madison University
Randall Vitray
Randall Vitray
Tax Management Portfolio Authors
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