Inventory Valuation and Control Inventory Inventories are business assets. Failure to keep accurate inventory records can lead to loss of profits and assets! Inventory • Uses of inventory records – Balance sheet preparation – Compute accrual net income – Validate insurance claims • Alternative types of firms – Retail – Manufacturing/Farming Inventory • Categories of inventory (mfrs/farms) – Materials – Work in process – Finished goods • Other assets that impact the balance sheet – Supplies – Breeding stock – Equip., real estate Inventory • Materials & supplies – Used up and later replaced • Generally applies to crop production – Replenished before being used up • Livestock feeding • Dairy production Inventory • Methods – Perpetual • Inventory subsidiary ledger is updated after each transaction • Inventory quantities are updated continuously. – Periodic • Purchases account is updated continuously • Inventory account is updated on a periodic basis, at the end of each accounting period http://accountinginfo.com/study/inventory/inventory-110.htm Inventory • Control & valuation – Perpetual LIFO – Perpetual FIFO – Periodic • Count, measure, or weigh • Determine value/cost per unit Inventory • FFSC recommendations – Inventories of harvested crops and raised livestock held for sale: valuation should be at market value less the cost of disposal. Inventory • FFSC recommendations – Inventories of raised/harvested item to be used in the production process: market valuation is acceptable but not preferred to the lower of cost or market Inventory • FFSC recommendations – Inventories (such as feeder livestock, crops, etc.) that are purchased with the intention of being resold in the same general form: market valuation is acceptable but not preferred to valuation using the lower of cost or market Inventory • FFSC recommendations – Inventories purchased for use in the production process: valued at cost Inventory • FFSC recommendations – Producers should disclose the inventory valuation practices and follow those valuation practices consistently from one year to the next – A conservative valuation method should be used for valuing any inventory items that will be consumed in the next business cycle.
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