What
is inventory?
In business inventory
consist of two items i.e. items purchased for resale, item purchased to be used
in manufacturing. The manufacturing inventory can be further classified into
three classes or types i.e. raw material, work in progress and finished Goods.
What
is manufacturing inventory?
The manufacturing
inventory can be classified into three types i.e. inventory not yet used (Raw
material), partial manufactured Goods (Work in progress material) and fully
manufactured Good (Finished Goods).
What
are cost component of inventory?
Inventory cost includes
cost of purchase, import duties, carriage inward and manufacturing cost. All
cost incurred directly or indirectly to bring the inventory to its present
location and condition.
What
is present condition and location of inventory?
The present condition and
location of inventory for the purpose of valuation can be classified into four
condition and location i.e. inventory is ready to resale, inventory is ready to
used in manufacturing , inventory is partially manufactures and inventory fully
manufactured.
How
inventory is valued?
Inventory is valued at
lower of cost or net realizable value. Net realizable value is expected selling
price of the inventory minus cost necessary to complete the asset and sell the
asset. The cost may be calculated using specific cost method, first in First
out method or average method.
Where
specific cost method is used?
Specific cost method is
used where there are limited numbers of unit which are not interchangeable i.e.
Jumbo jet, heavy capacity Generators,
Where
FIFO and Average method is used?
The FIFO and average
method is used where there are a number of small items which can be exchange
with each other i.e. nuts and bolts.
Why
inventory is valued lower of cost or net realizable value?
Inventory is valued at
lower of cost or net realizable value under prudence concept which requires
that assets are not to be overstated in the financial statements.
How
inventory is initially measured?
Inventory is initially
measured at cost.
How
inventory is subsequently measured?
Inventory is subsequently
measured at lower of cost or net realizable value at reporting date (Balance
sheet date).
