1. Sung Cho Christy Grunebach Abby Schweickart Nate Slany
Inventory
Sung Cho
Christy Grunebach
Abby Schweickart
Nate Slany

2. Definition
Inventories are asset items that a company holds for sale in the ordinary course of business, or goods that it will use or consume in the production of goods to be sold.

3. Classification Merchandise Inventory Raw Materials Inventory
Merchandising Company
Wal-Mart
Balance Sheet
31-Jan-04
Current assets (in millions)
Cash and cash equivalents
$ ,199
Receivables
1,254
Inventories
26,612
Prepaid expenses and other
1,356
Total current assets
$ ,421
Manufacturing Company
Caterpillar
31-Dec-04
Cash $
Accounts Receivable
13,969
Raw materials
$ ,592
Work in process
664
Finished goods
2,209
Supplies
210
Total inventories
4,675
Other current assets
1,767
$ 20,856
Merchandise Inventory
Raw Materials Inventory
Work In Process Inventory
Finished Goods Inventory

4. Basic Issues In Inventory Valuation
The physical goods to include inventory
The costs to include in inventory
The cost flow assumption to adopt

5. Physical Goods Included in Inventory
Goods in Transit
Consigned Goods
Special Sales Agreements

6. Costs Included in Inventory
Product Costs- Those costs that “attach” to the inventory.
Period Costs- The costs that are indirectly related to the acquisition or production of the goods.
Treatment of Purchase Discounts

7. The Cost Flow Assumption to Adopt
Specific Identification- Identifying each item sold and each item in inventory.
Average Cost-Prices items in the inventory on the basis of the average cost of all similar goods available during the period.
FIFO (First in, First out)
LIFO (Last in, First out)
The cost flow used goes under the “Significant Accounting Policies” on the disclosures

8. Disclosures: FAS 151 Inventory Costs
Amends ARB No. 43 chapter 4 “Inventory Pricing”
“..under some circumstances items such as idle facility expense, excessive spoilage, double freight and rehandling costs may be so abnormal as to require treatment as current period charges...”

9. FAS 151 Changes Made to ARB No. 43:
1. Those items must be recognized as current period charges regardless of whether they meet the criterion of “so abnormal”
2. Allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities

10. FAS 151
Variable overhead costs of production are allocated on the basis of actual use
Fixed overhead costs of production are allocated on the basis of normal capacity
Normal Capacity: Production expected to be achieved over a period
Unallocated overheads are recognized as an expense in the period in which they are incurred

11. FAS 89
16. Current cost amounts of inventory and property, plant, and equipment are measured as follows:
a. Inventory at current cost or lower recoverable amount at the measurement date

12. FAS 89
The current cost of inventory is the current cost to purchase the inventory or the current cost of the materials required to produce the good (including some overhead expenses that are allowed under GAAP).

13. FAS 89: Ways to calculate price
a. Indexation
(1) Externally generated price indexes for the class of goods or services being measured
(2) Internally generated price indexes for the class of goods or services being measured
b. Direct pricing
(1) Current invoice prices
(2) Vendors’ price lists or other quotations or estimates
(3) Standard manufacturing costs that reflect current costs.

14. FAS 89: Current Cost Amounts of Inventory
Historical cost
Property, plant, and equipment and most inventories are reported at their historical cost, which is the amount of cash or its equivalent, paid to acquire an asset, commonly adjusted after acquisition for amortization or other allocations.
Current cost
Some inventories are reported at their current cost, which is the amount of cash, or its equivalent, that would have to be paid if the same of an equivalent asset were acquired currently.

15. FAS 89: Current Cost Amounts of Inventory
The increase or decrease in the current cost amount of inventory represents the difference between the measures of the assets ate their entry dates for the year and the measures of the assets at their exit dates for the year (FAS 89 ¶34).

16. FAS 89: Current Cost Amounts of Inventory Presentation
For the current year
The changes in current cost amount of inventory is reported both before and after eliminating the effects of general inflation.
In the five-year summary
Increase or decrease in the current cost and net of inflation for each of the five most recent years.

17. FAS 89: Current Cost Amounts of Inventory Calculation
December 31, 19x5
1,000,000 units, $58,000,000 of historical cost
Current cost is $58/unit
December 31, 19x6
900,000 units, $65,700,000 of historical cost
Current cost is $73/unit
3,036,000 units produced
3,136,000 units sold
Consumer Price Index for All urban Consumers
December 19x5 :
Average 19x :
December 19x6 :

18. FAS 89: Current Cost Amounts of Inventory Calculation
Current Cost of Inventory and Cost of Goods Sold (for 19x6)
Current cost at the beginning of year
$58/unit
Current cost at the end of year
73/unit
$131/unit
Average current cost ($131/2)
$65.5/unit
Units sold during the year
X 3,136
Average current cost goods sold
$205, 408