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Inventory - Basic Accounting of Inventory

Inventory is considered a current asset because a company normally sells it within a year or within its operating cycle. Inventory consists of products acquired for resale to customers. For many companies, inventory is a major asset and a significant source of revenue.

Assume that several items of inventory are acquired for a total price of $100. This transaction results in an increase in inventory and a decrease in cash.

Now assume that half the inventory is sold for $75. This transaction is analyzed in two steps. The revenue part increases cash and shareholders’ equity by $75. The expense part decreases inventory and shareholders’ equity by $50 (half of the $100 historical cost).

The difference between the sales price of $75 and the cost of goods sold (CGS) of $50 is the gross profit or gross margin.

• Lower-of-Cost-or-Market (LCM) Rule
• Cost Flow Assumptions
  • Specific Identification Method
  • Average-Cost method
  • First-in, First-out (or FIFO) method
  • Last-in, First-out (LIFO) inventory method
  • Financial Statement Effects of Inventory Method
• The Choice of Inventory Method
• Valuation of Inventories at Lower of Cost or Market
• The inventories of manufacturers
• Analysis of Inventories
• Comparing LIFO and FIFO Firms

Current Assets Topics

• Cash and Cash Equivalents
• Marketable Securities
• Accounts Receivable
• Inventory
• Prepaid Expenses