Inventory is the merchandise or supplies on hand or in transit at a particular point in time. The three types of inventory for a manufacturing company are raw materials, work-in- process, and finished goods. Included in the inventory are:
- goods in transit for which title has been received.
- goods out on consignment.
Inventory is recorded in the accounting records typically at the lower of cost or market value. An inventory count usually occurs at year-end to assure that the physical quantity equals the quantity per books. At the end of the accounting period, beginning and ending inventories are presented in the income statement in the cost-of-goods-sold calculation, and ending inventory is shown in the balance sheet under current assets.
Four inventory methods have gained wide acceptance and are considered generally accepted. These methods are FIFO, LIFO, weighted average and specific identification. If your business is in United States, the Internal Revenue Service (IRS) require that any businesses which re-sell merchandise inventory must keep accounting records on the accrual basis. The consistency convention requires that businesses not change inventory methods often.
Use of an inventory method does not mean that the physical flow of goods follows the cost flow. The methods are used to better approximate current economic conditions of the costs involved. Therefore, even if an organisation is using LIFO for inventory costing, the actual flow of physical goods could be on a FIFO basis.
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