Inventory accounting - FIFO vs LIFO - Is this disclosed in ARs?

Thread Rating:
  • 0 Vote(s) - 0 Average
  • 1
  • 2
  • 3
  • 4
  • 5
#21
Inventory Costing Method and Rule on Inventory Valuation.

Inventory Valuation
http://www.investopedia.com/exam-guide/c...tories.asp

The inventory-costing methods used relate to the way management has decided to evaluate the cost of their inventory, for example, specific identification, average cost, first in first out (FIFO), or last in first out (LIFO). The costing method will have an impact on the estimated value of the inventory on hand and the estimated cost of goods sold (COGS) reported on the income statement.

Inventory Costing Methods
The cost of inventory can be calculated based on:
1) the specific identification method,
2) the average-cost method,
3) first in, first out (FIFO), and
4) last in, first out (LIFO)

GAAP allows management to use four methods to evaluate inventory. The valuation method is the process by which the inventory is valued.

In all the above methods, inventory is initially captured at cost.

Rule on Inventory Valuation
GAAP requires inventory to be valued at the lower of cost or Net Realisable Value.

Obsolete Stock or Not-so-good Stock that can fetch a value below cost needed to have the value written down to the said value in the books. It is mostly reflected in the form of provision for stock obsolescence.

In another word, regardless of which inventory method used, they are subjected to the inventory rule of lower of cost or NRV.

PS: LIFO is different from replacement value. Said if the inventory is last purchased at $40 and the current replacement value is $30, the book will capture the inventory at $40 for LIFO. Should the NRV be $32, then the rule of valuation requires an obsolescence charge of $8 taken to the profit & loss and the inventory stay in the Bal Sheet at $32.
Reply
#22
(08-01-2015, 09:43 AM)CityFarmer Wrote:
(08-01-2015, 08:25 AM)GFG Wrote:
(08-01-2015, 01:26 AM)PGL Wrote: The FIFO/LIFO explanations are now clear.
What is still not clear to me is how losses or gains on Inventory held as an asset are accounted for?
For example, if the Oil Price goes down, so does the value of the Inventory held as an asset, and vice versa on the way up.
Is this loss(or gain) provisioned for (or booked as a revaluation gain) in the Income Statement or is this asset simply written down in the Balance Sheet without impacting the Income Statement.
If the former, we are headed for lower EPS in 2015 for companies carrying Oil Inventories.
PGL

It cannot be written down in the BS without impacting the income statement, unless there have been provisions made in prior years.
In that case, the amt written off would still be charged to income statement but in an earlier year.
So if the value of inventory is adjusted, it will show up on income

I am not an accountant. With a limited understanding, here is what I know

Write-downs of inventory to net realisable value, is done as an expense of cost of inventories sold. The same for the reversals of the write-down.

Company will recognize a holding loss which is charged to the cost of goods sold, in the current period, rather than to the period where the goods are sold. (There lies the grey area, for those of you who understands the practical execution of this principle).

Technically, on a double entry accounting, writedowns are credit to inventory and debit to cost of goods sold.
Reply


Forum Jump:


Users browsing this thread: 9 Guest(s)